Chapter 62, Problem 4MCQ

To determine

Location of the marginal cost curve, average cost curve, marginal revenue, and demand curve in the natural monopoly graph.

Answer to Problem 4MCQ

(a) Marginal cost curve is below the average total cost curve.

Explanation of Solution

Where the average total cost curve for a natural monopoly crosses the demand curve, the marginal cost curve is below the average cost curve because the average total cost is down until it crosses the demand curve and then it starts rising, and never touches the marginal cost which is horizontal and fixed. Hence, option (a) is correct, and (b) is incorrect.

The marginal revenue is downward sloping and always remains below the demand curve. Hence, options (c) and (d) are incorrect.

At the intersection of the average total cost curve and demand curve, the marginal cost curve remains below the demand curve, hence option (e) is incorrect.

Economics Concept Introduction

In natural monopoly, the marginal cost curve is horizontal, the average total cost is downward sloping, and the demand curve and marginal revenue curves are downward slopings, but MR remains below the demand curve.