Suppose a firm has a variable cost function VC = 20Q with avoidable fixed cost of $50,000.What kind of firm is this?
A) This firm is a natural monopoly because as Q rises, AC falls.
B) This firm is a natural monopoly because as Q rises, AC rises.
C) This firm is a natural monopoly because as Q rises, VC falls.
D) This firm is a natural monopoly because as Q rises, VC rises.

Question

Quizplus · Accepted Answer

A natural monopoly typically has a cost structure where average costs (AC) decrease as output (Q) increases, due to high fixed costs and relatively low variable costs. In this case, with VC = 20Q and fixed costs of $50,000, as Q increases, the average cost (AC = VC/Q + Fixed Costs/Q) decreases because the fixed cost is spread over more units, fitting the description of a natural monopoly.

Suppose a Firm Has a Variable Cost Function VC =