Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It suggests that multiple firms can operate efficiently in the market.
B
It indicates that a single firm can supply the market at a lower cost than multiple firms.
C
It proves that competition always leads to better prices for consumers.
D
It shows that market entry barriers are low for new firms.
Understanding the Answer
Let's break down why this is correct
Answer
Natural monopolies occur in industries where a single company can produce goods or services at a lower cost than multiple companies could. This typically happens because of high fixed costs and low marginal costs, which means that as the company produces more, the average cost per unit decreases. The long-run average cost curve shows this trend, indicating that there is a point where the cost of producing an additional unit becomes very low, making it inefficient for new competitors to enter the market. Competition policy decisions must consider this curve; if new companies enter the market, they may struggle to compete on price, potentially leading to higher costs for consumers. For example, in the utility industry, if multiple companies tried to provide electricity, they would each have to invest heavily in infrastructure, leading to higher overall costs for everyone involved.
Detailed Explanation
A single company can produce goods at a lower cost than many companies. Other options are incorrect because Some might think many companies can work well together; It's a common belief that competition always helps prices.
Key Concepts
Market structure
Competition policy
Long-run average cost curve.
Topic
Natural Monopolies
Difficulty
hard level question
Cognitive Level
understand
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