Natural monopoly analysis 6. Natural monopoly analysis The following graph shows

Question

Natural monopoly analysis

6. Natural monopoly analysis The following graph shows the demand (D) for gas services in the imaginary town of Utilityburg. The graph also shows the marginal revenue (MR) curve, the marginal cost (MC) curve, and the average total cost (ATC) curve for the local gas company, a natural monopolist. On the following graph, use the black point (plus symbol) to indicate the profit-maximizing price and quantity for this natural monopolist. 20 18 16 O 14 12 10 Monopoly Outcome 6 CO ATC MC 2 MR 0 1 2 3 4 5 6 7 8 9 10 0 123 4 5 67 8 9 10 QUANTITY (Hundreds of cubic feet)

Explanation / Answer

Option B and option D is correct.

A natural monopoly arises when there is very high amount of start-up cost. Such a cost can’t be borne by a small firm. Since the firm is putting a very high amount of money, it expects a very significant economies of scale from production and distribution. Since, in this case, it is gas that is an utility company and it has potential to exploit monopoly power, government intervene and regulate these companies.

True.

If government do not intervene, these firms will use their monopoly power and charge a very high price. Since utilities are essential for life, everybody has to buy it, so these company will earn abnormal profits in both short and long run.

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