Answer: true
Step-by-step explanation:
Step-by-step explanation:
When a firm faces large fixed costs and small constant marginal costs, the average total cost (ATC) of production will decline as the quantity (q) of output increases. This is because fixed costs are spread over a larger quantity of output, leading to a lower average cost per unit.
In the case of utility companies, such as electricity or water providers, they often have high fixed costs associated with building and maintaining infrastructure, such as power plants or water treatment facilities. Once this infrastructure is in place, the marginal cost of producing additional units of electricity or water becomes relatively small and constant.
In a perfectly competitive market, firms are price takers, and the market price is determined by the interaction of supply and demand. In such a market, the firms are typically small and cannot influence the market price. However, if a firm is a monopoly, it has market power, meaning it can set the price for its product or service.
Given the cost structure of utility companies with large fixed costs and small marginal costs, the average total cost decreases as output increases. In this scenario, a monopoly may be preferable to a perfectly competitive market from the perspective of consumers. This is because a monopoly can produce at a lower average cost and potentially pass on some of those cost savings to consumers in the form of lower prices.
However, it is essential to consider the trade-offs of having a monopoly. While consumers may benefit from lower prices in the short run, a monopoly may lack the competitive pressure to innovate, improve services, or maintain efficiency over the long term. Additionally, monopolies can potentially abuse their market power, leading to higher prices and reduced consumer welfare if not properly regulated.
In real-world situations, regulatory bodies often oversee utility companies to prevent abuse of market power and ensure that consumers are protected. The goal is to strike a balance between the potential cost advantages of a monopoly and the benefits of competition in terms of efficiency and innovation.