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 is the only provider of light rail service in Minneapolis. As a result, it has no competition and can charge high prices. Reading's is also experiencing decreasing average total cost because the fixed costs of building the light rail system are spread over a larger number of riders. Finally, new entrants to the market know they will have a smaller market share than Reading's currently has because Reading's has a large capacity and is already well-established in the market.

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