Question

What is a natural monopoly?

a. A market in which there is only one firm.
b. A monopoly that results from government issuing patents.
c. A monopoly resulting from one firm's exclusive ownership of a natural resource required to produce a good.
d. A monopoly that results when one firm is able to produce at a lower cost than multiple firms, giving large firms with higher levels of output an advantage over smaller competitors.

Which of the following firms is most likely to be a natural monopoly?

a. Municipal Power Light, the local supplier of electricity.
b. A pharmaceutical company that has the exclusive right to sell a patented drug.
c. A firm that owns nearly all of the diamond mines in the world.
d. A restaurant that is unable to practice price discrimination and must charge all consumers the same price.

Answer 1

D. A monopoly that results when one firm is able to produce at a lower cost than multiple firms, giving large firms with higher levels of output an advantage over smaller competitors.

A. Municipal Power Light, the local supplier of electricity.

Explanation: A natural monopoly is a monopoly enjoyed by a firm due to its large nature through which it is able to enjoy Economies of scale and produce at a reduced cost which other companies are unable to meet up with.

WITH A NATURAL MONOPOLY, A FIRM HAS A CONTROL OVER THE PRICE OF THE PRODUCT PRODUCED AND SERVICE RENDERED AS THERE ARE NO CLOSE SUBSTITUTE.

The municipal Power light, the local supply of power is an example of a firm that can enjoy Natural monopoly.