Suppose a single firm can produce 100 units at an average cost of $15. If two firms produce 50 units each, the total cost rises to $2,500. Which of the following is true about this market?
A) The demand for this product will be higher if there are two firms producing the product than if there is only one.
B) It is more efficient to have two firms so they each have a competitor.
C) Neither firm can make a profit.
D) It is a natural monopoly.

Question

Quizplus · Accepted Answer

A natural monopoly occurs when a single firm can produce output at a lower cost than can multiple firms, which is the case here. The single firm's total cost for 100 units is $1,500 ($15 per unit), whereas the total cost for two firms producing 50 units each is $2,500, indicating higher efficiency in production for the single firm.

Suppose a Single Firm Can Produce 100 Units at an Average