Question

What is a natural monopoly? a.A monopoly that results from government issuing patents. b.A market in which there is only one firm. c.A monopoly that faces a high fixed cost and low marginal costs so that the average total cost curve slopes downward. d.A monopoly resulting from one firm's exclusive ownership of a natural resource required to produce a good. Which of the firms is most likely to be a natural monopoly? a.A pharmaceutical company that has the exclusive right to sell a patented drug. b.A restaurant that is unable to practice price discrimination and must charge all consumers the same price. c.A firm that owns nearly all of the diamond mines in the world. d.Municipal Power Light, the local supplier of electricity.

Answer 1

Answer:

Option (c) is correct.

Option (d) is correct.

Explanation:

1. Under the market structure of natural monopoly, its cost of production states that initially there is a need of large amount of investment and after that the marginal cost of producing output becoming so low that the average total cost keeps on falling until the point at which whole market being served.

2. Municipal Power Light, the local supplier of electricity is an example of natural monopoly. In this type service, there is a need of large amount of investment in setting the cables infrastructure and grid and after that the marginal cost of providing each additional unit of electricity is so low that the average total cost keeps on falling which is represented by the downward sloping average total cost curve.