Final answer:
A natural monopolist can achieve substantial economic profits by producing where marginal revenue equals marginal costs and setting prices based on the market demand, exploiting economies of scale, and facing minimal competition due to high barriers to entry.
Step-by-step explanation:
A natural monopolist may obtain substantial economic profit by setting production at the quantity where marginal revenue (MR) equals marginal cost (MC), and then determining the price to charge based on the market demand curve. In industries with significant economies of scale and low marginal costs of adding an additional customer—such as water or electricity supply—once the initial, fixed costs are covered, a natural monopoly could exist because it is more efficient for one firm to supply the entire market. This efficiency occurs because any additional firms would need to make duplicate capital investments, which is costly and unnecessary.
For example, if a natural monopoly produces at point A, with a quantity of 4 and a price of 9.3 as suggested by Figure 11.3, it can maximize profits. The high fixed costs associated with infrastructure investments are spread over a large number of customers, resulting in lower average costs as output scales up. As a result, these monopolists can charge prices above marginal costs, leading to substantial economic profits without fear of competition because market conditions deter the entry of new competitors.