Question

Once a water company lays the main water pipes through a neighborhood, the marginal cost of providing water service to another home is fairly low. Where will the demand curve for water intersect the long-run average cost (LRAC) curve for this company?

Answer 1

The demand curve will intersect the long-run average cost (LRAC) at its downward sloping point.

Step-by-step explanation:

Usually utility companies are monopolies because the cost of setting up the service is very high, but once the initial investment is finished, the average cost of providing the service is extremely low. This applies to all utilities: electricity, water, natural gas, etc. The marginal cost of adding new customers is also extremely low.

Most utilities are public companies because consumers demand the service but are not willing to pay a high price for it.