C.R. Evans, a transportation corporation, has just completed the development of a new subway system in Melbourne. Currently there are plenty of seats on the subway, and it is never crowded. Its capacity well exceeds the needs of the city. After just a few years of operation, the shareholders of C.R. Evans common stock are experiencing incredible rates of return on their investment, due to the profitability of the corporation.
-According to the information provided, which of the following statements are most likely to be true? (i) C.R. Evans is a natural monopoly
(ii) new entrants to the market know they will earn a smaller piece of the market than C.R. Evans currently has
(iii) C.R. Evans is most likely experiencing increasing average total cost

Question

Quizplus · Accepted Answer

The fact that the new subway system has well exceeded the needs of the city and there are plenty of seats available indicates that it is a natural monopoly since it has enough capacity to serve the entire market. This means that new entrants will not be able to compete with C.R. Evans since they will not be able to capture a significant portion of the market. Therefore, (i) and (ii) are most likely to be true. Option (iii) is not necessarily true as the profitability of C.R. Evans may be due to other factors such as efficient cost management or high demand, rather than increasing average total cost.

CR Evans, a Transportation Corporation, Has Just Completed the Development