Final answer:
The average cost curve for a natural monopoly falls as output increases due to economies of scale, which is evident when the demand curve intersects with the downward-sloping part of the long-run average cost curve.
Step-by-step explanation:
The average cost curve for a natural monopoly falls as output increases. This is because a natural monopoly experiences economies of scale over the range of output that satisfies market demand. For instance, when the demand curve intersects with the long-run average cost (LRAC) curve at its downward-sloping part, it is an indication of a natural monopoly situation.
This occurs when the quantity demanded in the market is less than the minimum quantity necessary to be at the bottom of the LRAC curve. Unlike average cost curves for other market structures, which tend to be U-shaped due to initially decreasing and then increasing average costs, the LRAC in a natural monopoly keeps declining over the relevant range of output, due to the high initial fixed costs being spread out over a larger quantity of output, which reduces the average cost.