natural monopoly

Question 1

analysis

Answer 1

• a natural monopoly is a market with very high fixed costs
• ( an industry (rail)) can be considered a natural monopoly because of high costs associated with distribution
• as a profit maximising monopoly, the firm would produce at MR=MC, which is at QPM in the diagram
• at QPM the average cost of production would be C1.

CONTEXT CONTEXT CONTEXT

• if firms output was reduced ( increase in competition would shift the firms demand curve (AR) to the left. reducing the profit maximisation quantity) to Q2 the average cost works rise to c2