A firm that is a natural monopoly
A)is not likely to be concerned about new entrants eroding its monopoly power.
B)is taking advantage of economies of scale.
C)would experience a higher average total cost if more firms entered the market.
D)All of the above are correct.

Question

Quizplus · Accepted Answer

A natural monopoly is a situation where one firm can produce the entire output of the market at a lower cost than any combination of two or more firms. This is usually due to economies of scale, where the firm's average total cost decreases as it increases output. As a result, the firm is able to charge a price that is higher than its marginal cost and earn economic profit in the long run. In such a situation, the firm is not likely to be concerned about new entrants as they will not be able to compete on the basis of cost. Additionally, if more firms entered the market, the firm's average total cost would increase due to a decrease in output and utilization of its capital equipment, making it even harder for new entrants to compete.

A Firm That Is a Natural Monopoly