The defining characteristic of a natural monopoly is
A)constant marginal cost over the relevant range of output.
B)economies of scale over the relevant range of output.
C)constant returns to scale over the relevant range of output.
D)diseconomies of scale over the relevant range of output.

Question

Quizplus · Accepted Answer

A natural monopoly occurs when economies of scale are present over the relevant range of output. This means that as the firm grows and produces more output, its costs per unit of output decrease. This creates a barrier to entry for potential competitors, as they would have to produce at a much larger scale to compete on cost, which can be difficult to achieve. Constant marginal cost would not create a natural monopoly, as it implies that the firm's costs per unit of output are not impacted by the level of production. Constant returns to scale also would not create a natural monopoly, as it suggests that the firm's costs will remain constant as it increases its output, meaning that there is no barrier to entry. Diseconomies of scale imply that a firm's costs per unit of output increase as production increases, which would not create a natural monopoly.

The Defining Characteristic of a Natural Monopoly Is