Scenario 15-1
Consider a transportation corporation named Reading's that has just completed the development of a new light rail system in Minneapolis. Currently, there are plenty of seats on the train, and it is never crowded. Its capacity far exceeds the needs of the city. After just a few years of operation, the shareholders of Reading's experienced incredibly high rates of return on their investment due to the profitability of the corporation.
-Refer to Scenario 15-1. 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 Reading's
Currently has.
Ii) Reading's is most likely experiencing decreasing average total cost.
Iii) Reading's is a natural monopoly.
A) i) and ii) only
B) ii) and iii) only
C) i) and iii) only
D) i), ii), and iii)

Question

Quizplus · Accepted Answer

Reading's is a natural monopoly because it has a large capacity that far exceeds the needs of the city, and it is currently experiencing high rates of return on its investment. This suggests that it has a cost advantage over potential competitors, and that new entrants to the market would have a smaller market share than Reading's currently has. Additionally, Reading's is likely experiencing decreasing average total cost, as its fixed costs are spread over a larger number of units of output.

Scenario 15-1 Consider a Transportation Corporation Named Reading's That Has Just Completed