A natural monopoly
A) sells to a single buyer.
B) sets price equal to marginal revenue.
C) is a firm than can supply the market at lower average total cost than two or more firms.
D) produces a natural resource.
E) faces a horizontal demand curve.

Question

Quizplus · Accepted Answer

A natural monopoly is a situation where a single firm can produce and supply the entire market demand at a lower cost than any combination of two or more firms. This is due to high fixed costs of production that can only be efficiently spread over a large scale of output. Therefore, a natural monopolist faces a downward-sloping demand curve and can potentially earn economic profits in the long run by charging a price higher than its marginal cost. Choices A, B, D, and E are not applicable to the definition of a natural monopoly.

A Natural Monopoly