Question

3. Let the average cost curve for any firm in an industryb AC 12 where Q is firm output so that the average cost for various levels of output is the following: Level of output of the firm Average cost of the firm AC infinite AC# 24625 AC- 13.5 AC-10.625 АС. 10 AC# 11.5 AC-15 Q-0 Q#1 Q-2 Let inverse market demand be 12-Q. Is this industry a natural monopoly? Elaborate.

Answer 1

No, this firm is not natural monopoly, bcoz natural monopoly is a firm is that has so large economies of scale that a single form can supply the entire market at a lower average cost than two or more firms

For natural economy, average cost should continuously fall over a large range of output such that Economics of scale are generated.

Also MC is always lower than AC

Now AC falls continuously till Q = 2, after that it increases.

Also As TC = Q* AC

TC = 12 + Q^{​​​​​​2}+Q^{​​​​​​3}/2

So MC = 2Q + 3Q²/2

Now MC is continuously rising

So it is not natural monopoly