Question

A natural monopoly exists when?

a. there are no rivals in the market.
b. one firm can supply the entire market at a lower cost than two or more firms,
c. the average total cost curve is upward sloping,
d. the government protects the firm by granting an exclusive franchise,
e. production can take place with constant returns to scale

Answer 1

A natural monopoly exists when one firm can supply the entire market at a lower cost than two or more firms, usually due to large fixed costs relative to variable costs. This prevents smaller firms from competing and larger firms from selling their output.

Step-by-step explanation:

A natural monopoly exists when one firm can supply the entire market at a lower cost than two or more firms. This typically happens when average costs are declining over the range of production that satisfies market demand, which is usually the result of large fixed costs relative to variable costs.

In a natural monopoly, no smaller firm can operate at a low enough average cost to compete and no larger firm could sell what it produced given the quantity demanded in the market.