Figure 8.12
-If a severe natural disaster reduced the population of a city, one would expect a natural monopoly to

Question

Quizplus · Accepted Answer

A natural monopoly occurs when a firm's economies of scale are so large that the firm can supply the entire market demand at a lower average cost than any potential competitor. In the case of a severe natural disaster reducing the population of a city, the demand for the firm's services decreases, which means that the firm will have excess capacity that will lead to an increase in average costs. Therefore, D is the correct answer. Lowering prices, splitting into two firms, or merging with a competitor are unlikely responses to a decrease in demand.

Figure 8.12 -If a Severe Natural Disaster Reduced the Population of a of a City