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. ------ 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…
yep… beat me by a minute
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
It was a good question, lola. bummer, that everyone beat me though 
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: ------------------------------------------------------- > 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.
B because the LRAC decreases as production increases, decreasing the LRTC.
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)?