In natural monopoly,AC continuously declines due to economies in distribution or in production,which tends to found in industries which face increasing returns to scale.If price were set equal to marginal cost,then:
A) price would equal average cost.
B) price would exceed average cost.
C) price would be below average cost.
D) price would be at the profit maximizing level for natural monopoly
E) all of the above

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Quizplus · Accepted Answer

In a natural monopoly, the AC continuously declines due to economies of scale. If price were set equal to marginal cost, which is lower than average cost, then the price would be below average cost. This would result in a loss for the monopolist since the cost is higher than the revenue generated from setting prices at this level. Therefore, price cannot be set equal to marginal cost, and a natural monopoly will typically charge a price higher than marginal cost but lower than average cost, leading to a degree of pricing power for the monopolist.

In Natural Monopoly,AC Continuously Declines Due to Economies in Distribution