In a natural monopoly, throughout the range of market demand,
A)the marginal cost is above average total cost and pulls average total cost upward.
B)average total cost is above the marginal cost and pulls the marginal cost upward.
C)the marginal cost is below average total cost and pulls average total cost downward.
D)there are diseconomies of scale.

Question

Quizplus · Accepted Answer

In a natural monopoly, firms incur high fixed costs, due to which the average total cost initially decreases as output increases (economies of scale). However, as the output increases, the firm may face congestion and inefficiencies, leading to marginal cost increasing at higher levels of output (diseconomies of scale). But since the natural monopolist has exclusive access to a critical resource or technology required for production, it faces no competition and can set price above marginal cost. Thus, to optimize profit, the natural monopolist produces where marginal cost equals marginal revenue (MR=MC) but charges a price above both MC and ATC levels. Hence, the marginal cost is below average total cost and pulls average total cost downward.

In a Natural Monopoly, Throughout the Range of Market Demand