Which of the following graphs correctly represents a natural monopoly market?

A) Market 1
B) Market 2
C) Market 3
D) Both market 1 and market 3

Question

Which of the following graphs correctly represents a natural monopoly market?

A) Market 1 
B) Market 2 
C) Market 3 
D) Both market 1 and market 3

Quizplus · Accepted Answer

In a natural monopoly market, there is a single dominant firm that can produce at a lower cost than any potential competitor, resulting in high barriers to entry. In Market 3, the cost curve (AC) is continuously decreasing as output increases, indicating economies of scale and the ability of the dominant firm to produce at a lower cost than any potential competitor. Market 1 may represent a monopolistic competition market where there are many firms competing, and Market 2 represents a perfect competition market, where many firms produce identical products with no market power.

Which of the Following Graphs Correctly Represents a Natural Monopoly