What challenge does a natural monopoly encounter regarding its cost structure, and what does this imply about the relationship between marginal cost and average cost?

Show Answers

An upward-sloping average cost curve with marginal cost exceeding average costAn upward-sloping average cost curve where marginal cost is less than average costA downward-sloping average cost curve with marginal cost greater than average costA downward-sloping average cost curve where marginal cost is below average costNone of the above

Explanation

A natural monopoly is characterized by a declining average cost curve over the relevant output range, meaning that average costs decrease as production increases. In this scenario, the marginal cost remains below the average cost, which explains why a single firm can supply the entire market more efficiently than multiple competitors.