A natural monopoly is producing an output level of 1,000 units per day.If the monopoly is broken up into 5 firms,then average total cost for each of the 5 firms
A)will exceed the monopolist's average total cost
B)will equal the monopolist's average total cost
C)will fall below the monopolist's average total cost
D)may equal or fall below the monopolist's average total cost
E)may equal or exceed the monopolist's average total cost

Question

Quizplus · Accepted Answer

A natural monopoly exists because a single firm can supply the entire market at a lower average total cost than multiple firms. Breaking it up into 5 firms would increase average total costs for each firm due to the loss of economies of scale.

A Natural Monopoly Is Producing an Output Level of 1,000