Question

5. 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.

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 electricity company is experiencing economies of scale. 

• 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 diseconomies of scale. 

True or False: Without government regulation, natural monopolies always earn zero profit in the long run. 

Answer 1

Answer 2

Answer) The following statements are true about natural monopoly:

1. The electricity company experience economies of scale.
2. The electricity company must own scarce resources.

Without government intervention the natural monopoly would always earn zero profit. It is false

Answer 3

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