Scenario 14-1
Consider a transportation corporation named C.R.Evans that has just completed the development of a new subway system in a medium-sized town in the Northwest.Currently,there are plenty of seats on the subway,and it is never crowded.Its capacity far exceeds the needs of the city.After just a few years of operation,the shareholders of C.R.Evans experienced incredible rates of return on their investment due to the profitability of the corporation.
-Refer to Scenario 14-1.Which of the following statements is most likely to be true? (i)New entrants to the market know they will have a smaller market share than C.R.Evans currently has.
(ii)C.R.Evans is most likely experiencing decreasing average total cost.
(iii)C.R.Evans is a natural monopoly.

Question

Quizplus · Accepted Answer

C.R.Evans is a natural monopoly because it is the only supplier of subway service in the town. As a result, it has no competition and can set prices as it wishes. The company is also experiencing decreasing average total cost, which means that the cost of producing each additional unit of output decreases as output increases. This is likely due to the fact that the subway system has a large fixed cost, such as the cost of building the tracks and stations. Once these costs are sunk, the marginal cost of producing each additional unit of output is relatively low. Finally, new entrants to the market know that they will have a smaller market share than C.R.Evans currently has. This is because C.R.Evans has a first-mover advantage and has already established a strong brand name and customer base.

Scenario 14-1 Consider a Transportation Corporation Named C.R.Evans That Has Just Completed