The following graph shows the demand curve for a good and the long run average cost curve for a typical firm in this market.
If the government does not intervene in the market, then
A) there will be many firms in this market, all of whom will take the market price as given and produce where price equals marginal cost
B) there will only be 1 firm in this market, and they will produce where marginal revenue equals marginal cost
C) there will only be 1 firm in this market, and they will take the price as given and produce where price equals marginal cost
D) no firms will enter this market

Question

Quizplus · Accepted Answer

Given the information about the demand curve and the long run average cost curve, the scenario described is characteristic of a natural monopoly. In a natural monopoly, due to high fixed costs or other barriers, one firm can supply the entire market at a lower cost than if there were multiple firms. Therefore, there will only be one firm in the market, and it will produce where marginal revenue equals marginal cost to maximize profit.

The Following Graph Shows the Demand Curve for a Good