Question

8. Natural monopoly analysis

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

Monopoly Outcome0123456789104036322824201612840PRICE (Cents per Kilowatt-hour)QUANTITY (Thousands of kilowatt-hours)DMRMCATC

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 electricity company must own a scarce resource.

The electricity company is experiencing economies of scale.

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

Following statements are true about a natural monopoly:

• The electricity company is experiencing economies of scale.
• it is more efficient on the cost side for one producer to exist in the market rather than a large number of producers.

(Other statements are wrong because the electricity company doesn't have any scarce resources but the high initial cost makes it a monopoly and government can dilute not make a monopoly in this case. )

The statement that without government regulation natural monopoly can earn a positive profit, in the long run, is "True"

(there is no graph given in the question, put the plus symbol at the point where the MR curve and MC cure meet. That is the point where the monopoly will produce to maximise profit. )