Which of the following is true under natural monopoly?
A) The marginal cost curve will be above the average cost curve.
B) The monopolist will set price equal to marginal cost and will earn economic profits.
C) Economies of scale exist.
D) Output is produced under conditions of constant cost.

Question

Quizplus · Accepted Answer

Natural monopoly occurs when a single firm can produce at a lower cost than any potential competitor, due to economies of scale. Therefore, the presence of economies of scale is a defining characteristic of natural monopoly. The marginal cost curve may or may not be above the average cost curve, depending on the specific cost structure of the natural monopoly. The monopolist may or may not set price equal to marginal cost, and may or may not earn economic profits. Constant costs are not a defining characteristic of natural monopoly.

Which of the Following Is True Under Natural Monopoly