Multiple Choice
Which of the following qualities would ideally suit a monopolistic firm with regard to barriers to entry?
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12. Monopoly
Characteristics of Monopoly
Multiple Choice
Which of the following is true of a natural monopoly?
A
It is characterized by many firms competing in the market.
B
It experiences declining average total costs over a wide range of output.
C
It faces perfectly elastic demand for its product.
D
It can only exist if government regulation prohibits entry.
Verified step by step guidance1
Step 1: Understand the definition of a natural monopoly. A natural monopoly occurs when a single firm can supply the entire market demand at a lower cost than multiple firms could, due to economies of scale over a wide range of output.
Step 2: Recognize that a natural monopoly is characterized by declining average total costs (ATC) as output increases. This means the firm's ATC curve slopes downward over the relevant range of production.
Step 3: Analyze the options given: 'many firms competing' contradicts the idea of a natural monopoly, which typically has one dominant firm due to cost advantages.
Step 4: Consider the demand elasticity faced by a natural monopoly. It usually faces a downward-sloping demand curve, not a perfectly elastic one, because it is the sole supplier in the market.
Step 5: Understand that a natural monopoly can exist without government regulation prohibiting entry; it arises naturally from cost structures, although regulation may be applied to control prices or output.
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