If the distribution of water is a natural monopoly, thenGroup of answer choicesa single firm cannot serve the market at the lowest possible average total cost.allowing for competition among different firms in the water-distribution industry is efficient.average cost increases as the quantity of water produced increases.multiple firms would likely each have to pay large fixed costs to develop their own network of pipes.
Question
If the distribution of water is a natural monopoly, thenGroup of answer choicesa single firm cannot serve the market at the lowest possible average total cost.allowing for competition among different firms in the water-distribution industry is efficient.average cost increases as the quantity of water produced increases.multiple firms would likely each have to pay large fixed costs to develop their own network of pipes.
Solution
The statement "If the distribution of water is a natural monopoly" implies that a single firm can serve the market at the lowest possible average total cost. This is because a natural monopoly occurs when a single firm can supply a good or service to an entire market at a lower cost than could two or more firms.
Therefore, the correct answer is: "a single firm cannot serve the market at the lowest possible average total cost." This statement is incorrect in the context of a natural monopoly.
In a natural monopoly, allowing for competition among different firms in the water-distribution industry is not efficient. This is because the initial cost of laying down the infrastructure (like pipes) is very high, but the cost of serving additional customers is relatively low. If multiple firms were to lay down their own networks of pipes, this would result in unnecessary duplication of infrastructure and higher costs.
So, the statement "multiple firms would likely each have to pay large fixed costs to develop their own network of pipes" is correct.
The statement "average cost increases as the quantity of water produced increases" is not necessarily true in a natural monopoly. In fact, in a natural monopoly, average total cost typically decreases as output increases, due to economies of scale.
In conclusion, in the context of a natural monopoly in water distribution, it is most efficient for a single firm to serve the market, and competition would likely lead to higher costs.
Similar Questions
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