Question

Take the scenario where a public utility is a natural monopoly in the market. If a...

Take the scenario where a public utility is a natural monopoly in the market. If a competition policy is used and no restrictions are placed on the utility what will happen?

A) The utility will increase its costs.

B) The utility will not earn economic profits.

C) The utility will earn high economic profits.

D) The utility will charge a price equal to marginal cost

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Answer #1

Answer) A natural monopoly arises when average costs are declining over the range of production that satisfies market demand. This typically happens when fixed costs are large relative to variable costs.

In monopoly firm charge where MR equals MC so price level P is charged and Qis produced but in after the competition policy introduction firm will at price equal Marginal cost which leads to loss i.e price charged at P' and quantity Q'. So, the profit earned due to monopoly is compensated by the loss earn due to competition so there is no economic profit.

So, option B) is correct.

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