The figure to the right illustrates market demand for a monopoly along with its

Question

The figure to the right illustrates market demand for a monopoly along with its average total cost (ATC) curve. Is the monopoly a natural monopoly? The firm is not a natural monopoly because it experiences diseconomies of scale. is a natural monopoly because it can supply the entire market at lower average total cost than can two or more firms. is a natural monopoly because it has the potential to earn economic profits. is not a natural monopoly because its demand curve is not infinitely elastic. is a natural monopoly because its demand curve is downward sloping.

Explanation / Answer

When there are significant economies of scale and as a result average cost decreases over a wide range of output and reaches a minimum at an output rate that is large enough for a single firm to meet the entire market demand at a price that is profitable, natural monopoly is said to exist.

If we analyse the given graph then we can see that average total cost of given monopoly is decreasing over a wide range of output and is reaching a minimum at an output rate at which entire demand curve is covered which implies that the given firm can supply the entire market at lower average total cost than by two or more firms and when this happens monopoly is said to be a natural monopoly. So, the said monopoly firm is a natural monopoly.

Hence, the correct answer is option (B).

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