Scenario 15-2
Consider a local, privately-owned electrical cooperative named Poweshiek Power Company (PPCo). PPCo has just completed a clean-coal-burning electrical power plant in Iowa. Currently, PPCo can meet the electricity needs of all residents in the county. In fact, its capacity far exceeds the needs of the county. After just a few years of operation, the shareholders of PPCo experienced incredibly high rates of return on their investment due to the profitability of the corporation.
-Refer to Scenario 15-2. 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 PPCo currently has.
(ii)
PPCo is most likely experiencing rising marginal cost.
(iii)
PPCo is a natural monopoly.
(iv)
PPCo is most likely experiencing declining average total cost.
A)(i) and (ii) only
B)(i), (ii), and (iii) only
C)(i), (iii) and (iv) only
D)(i), (ii), (iii), and (iv)

Question

Quizplus · Accepted Answer

(i) is likely true because PPCo has already established itself as the primary provider of electricity in the county, making it difficult for new entrants to gain a significant market share.
(iii) is likely true because PPCo has the capacity to meet all the electricity needs of the county, indicating that it operates in a market where economies of scale are significant, resulting in a natural monopoly.
(iv) is likely true because PPCo is already profitable and has excess capacity, suggesting that it has achieved economies of scale, which leads to declining average total cost. (ii) is not likely true because there is no indication in the scenario that PPCo is experiencing rising marginal costs.

Scenario 15-2 Consider a Local, Privately-Owned Electrical Cooperative Named Poweshiek Power Company