Question

1. Assume that in an industry, the typical firm reaches its minimum average cost at 200,000 million units. The estimated output for the whole industry is 6 million units. Therefore, one can conclude that:

A) the industry is likely to support 30 firms, each producing at minimum cost. B)the industry is a natural monopoly. C)the price in the industry is higher than the perfectly competitive price. D)the output produced in the industry is less than the perfectly competitive output.

Answer 1

In the given case, it has been provided that total output of whole industry is 6 million units.

However, a typical firm reaches its minimum average cost at 200,000 million units.

This means that firm experiences declining average cost over a large range of output and due to this can cater to entire market demand at lowest price.

This kind of scenario is examined in case of natural monopoly.

Thus, the given industry is a natural monopoly.

Hence, the correct answer is the option (B).