Question

8. Natural monopoly analysis 

The following graph shows the demand (D) for gas 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 gas 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.

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

• The gas company is experiencing diseconomies of scale.

• The gas company must own a scarce resource.

• 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 long run.

• True

• False

Answer 1

(1) Monopoly outcome is at intersection of MR and MC curves.

(2) Only the following statement is true:

- It is more efficient on the cost side for one producer to exist in market (so that the natural monopolist has Cost leadership)

(3) TRUE

In absence of government regulations, if the monopolist can produce an output for which price exceeds ATC, it will be able to earn positive profit both in short run and long run.