Final answer:
A natural monopoly occurs when a single firm can produce a good or service at a lower cost compared to multiple competing firms due to economies of scale. In a natural monopoly, the profit-maximizing quantity and price occur where the marginal revenue equals the marginal cost. If the demand for the monopoly's product increases dramatically, the new profit-maximizing quantity and price would occur at the intersection of the new marginal revenue curve and marginal cost curve.
Step-by-step explanation:
A natural monopoly occurs when a single firm can produce a good or service at a lower cost compared to multiple competing firms. This is typically due to economies of scale, where the average cost of production decreases as the quantity produced increases. To illustrate this, we can draw a diagram with the demand curve, marginal revenue curve, and marginal cost curve.
- The demand curve represents the quantity of output consumers are willing to buy at different prices.
- The marginal revenue curve shows the additional revenue earned from selling one more unit of output.
- The marginal cost curve represents the additional cost of producing one more unit of output.
In a natural monopoly, the profit-maximizing quantity and price occur where the marginal revenue equals the marginal cost.
Suppose the demand for the monopoly's product increases dramatically. The new demand curve would shift to the right, indicating a higher quantity of output that consumers are willing to buy at each price.
As a result, the marginal revenue curve would also shift to the right, indicating increased revenue from selling additional units of output.
The marginal cost curve typically remains unchanged in the short run.
The new profit-maximizing quantity and price would occur at the intersection of the new marginal revenue curve and marginal cost curve.
It is important to note that the specifics of the diagram will vary depending on the data provided in Figure 9.6.