Question

Which of the following describe conditions under which a natural monopoly may emerge?

I. High fixed costs create barriers to entry

II. Marginal cost exceeds average cost

III. Long-run average total cost decreases as output increases


I
I and II
I and III
II and III
I, II, and III

Answer 1

Solution:

The correct answers are I and II.

The conditions under a natural monopoly may emerge include:

I. High fixed costs create barriers to entry – This is because of the high initial cost involved and the difficulty of the new entrant to capture a large part of the market to achieve the same low costs as the monopolist.

II. Long-run average total cost decreases as output increases – This is because of the economies of scale that exist in a natural monopoly, hence the larger scale of production leads to lower average costs.