Figure 10-1

-Refer to Figure 10-1.Which of the following statements about the firm depicted in the diagram is true?
A) The fact that this firm is a natural monopoly is shown by the long-run average total cost curve still falling when it crosses the demand curve.
B) The fact that this firm is a natural monopoly is shown by the continually declining market demand curve as output rises.
C) The fact that this firm is a natural monopoly is shown by the continually declining marginal revenue curve as output rises.
D) The fact that this firm is a natural monopoly is shown by the fact that marginal cost lies below the long-run average total cost where the firm maximizes its profits.

Question

Figure 10-1
 
-Refer to Figure 10-1.Which of the following statements about the firm depicted in the diagram is true?
A) The fact that this firm is a natural monopoly is shown by the long-run average total cost curve still falling when it crosses the demand curve. 
B) The fact that this firm is a natural monopoly is shown by the continually declining market demand curve as output rises. 
C) The fact that this firm is a natural monopoly is shown by the continually declining marginal revenue curve as output rises. 
D) The fact that this firm is a natural monopoly is shown by the fact that marginal cost lies below the long-run average total cost where the firm maximizes its profits.

Quizplus · Accepted Answer

A natural monopoly is a firm that has such a high fixed cost that it is most efficient to have only one producer. In the diagram, the fact that the long-run average total cost curve is still falling when it crosses the demand curve indicates that this firm is a natural monopoly. If there were other firms in the market, they would have higher costs, and this monopolist would be able to produce at a lower cost than any other firm. Therefore, it would eventually drive all other firms out of the market. B and C are incorrect because the declining market demand curve and marginal revenue curve are not unique to natural monopolies. D is incorrect because marginal cost lying below the long-run average total cost curve implies that the firm is not producing at the minimum average cost, which is not a characteristic of a natural monopoly.

Figure 10-1 -Refer to Figure 10-1.Which of the Following Statements About the Following