Question

8. Natural monopoly analysis

The following graph shows the demand (D) for cable services in the imaginary town of Utilityburg. The graph also shows the marginal revenue (MR) curve, the marginal cost (MC) curve, and the average total cost (ATC) curve for the local cable company, a natural monopolist.

On the following graph, use the black point (plus symbol) to indicate the profit-maximizing price and quantity for this natural monopolist.

 Which of the following statements are true about this natural monopoly? Check all that apply.

•  The cable company is experiencing economies of scale.

•  The cable company is experiencing diseconomies of scale.

•  In order for a monopoly to exist in this case, the government must have intervened and created it.

•  It is more efficient on the cost side for one producer to exist in this market rather than a large number of producers. 

True or False: Without government regulation, natural monopolies can earn positive profit in the short run.

•  True

•  False

Answer 1