Natural Monopoly

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In a natural monopoly:

A) one firm controls all natural resources.

B) the average total cost of production continually declines with increased output.

C) the government reserves the industry sector dealing with natural resources for a few firms only.

D) the price charged by a monopolist is determined by the intersection of the demand curve with the marginal cost curve.



Your answer: D was incorrect. The correct answer was B) the average total cost of production continually declines with increased output.

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I agree that B is correct, but what's wrong with D?
 
The price the monopoly will charge is where the MR=MC, not where the MC curve intersects the demand curve. This leads to a smaller output and consequently a higher price.

With perfect comp the P=MR=MC, but in a monopoly P>MR=MC. That is why then can earn an economic profit.
 
The price charged by a monopolist is taken from the demand curve where MR = MC

if that makes any sense....

So much easier to draw...
 
B is the answer, and that's because of 'Economies of Scale'

In a Monopoly, If I could rightly remember the graph, the quantity produced is where Marginal Cost Curve (MC) intersects the Marginal Revenue Curve (MR), but the price for that equilibrium quantity (Q*) is taken by extending the qty-line to interest the demand curve. Since monopolists are price searchers, they will charge as per what the demand curve has to offer.

- Dinesh S
 
duuh, yeah of course the price is where MC intersects MR. I was getting confused that the price is READ off the d-curve. Nevermind. Time to take a break, I guess.

thanks, guys.
 
dinesh, careful, "monopoly" and "natural monopoly" are distinct terms. Wiki offers some commentary on this.

Monopoly: http://en.wikipedia.org/wiki/Monopoly
Natural Monopoly: http://en.wikipedia.org/wiki/Natural_monopoly

And while I don't think anyone's debating that producing where MR = MC is the profit-maximizing level of output (even for monopolists), we should keep in mind that monopolies are often regulated and may not have the ability to behave like less-regulated profit-maximizing firms (e.g. rate-of-return regulation, and price regulation).

My apologies if I've misinterpreted your post.
 
hiredguns1 Wrote:
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> dinesh, careful, "monopoly" and "natural monopoly"
> are distinct terms. Wiki offers some commentary
> on this.
>
> Monopoly: http://en.wikipedia.org/wiki/Monopoly
> Natural Monopoly:
> http://en.wikipedia.org/wiki/Natural_monopoly

Cool.. thanks for the insider, I never thought they were different.

So what is a Microsoft then?

I know for sure that USPS is a Govt-Created monopoly i.e. government prohibits competition by law.

- Dinesh S
 
Microsoft is a monopoly. It doesn't benefit the consumer that Microsoft is a monopoly.

A natural monopoly are industries where it is advanatages to only have one player in the market. Like power and water.
 
Shouldn't the LRAC be a U-Shape curve where it display a IRS (Increasing Return to Scales), then to CRS (Constant) and then DRS (Decreasing)?

Best Regards,
Collin Yeo
http://collinyeo.blogspot.com
 
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