A natural monopoly arises when
A) one firm controls the supply of a unique resource.
B) a firm has many small firms that it can control.
C) there are firms which act together as a monopoly.
D) the long-run average cost curve slopes downward as it crosses the demand curve.
E) one firm naturally convinces the government to limit competition in the market.

Question

Quizplus · Accepted Answer

A natural monopoly arises when a single firm can produce the entire output of the market at a lower cost than multiple firms could. This occurs when the long-run average cost curve slopes downward as it crosses the demand curve, indicating that the firm can achieve economies of scale over the entire range of production required to meet market demand. Thus, the firm can supply the entire market at a lower cost than any potential competitor, effectively creating a barrier to entry and resulting in a monopoly. Options A, B, and E do not accurately describe the conditions necessary for a natural monopoly to arise, while option C describes a collusion or cartel rather than a natural monopoly.

A Natural Monopoly Arises When