Question

If the distribution of water is a natural monopoly, then (i) multiple firms would likely each have to pay large fixed costs to develop their own network of pipes. (ii) allowing for competition among different firms in the water-distribution industry is efficient. (iii) a single firm can serve the market at the lowest possible average total cost. A. (ii) and (iii) only B. (i) and (iii) only C. (i) and (ii) only D. (iii) only

Answer 1

Answer: the correct answer is B. (i) and (iii) only

Explanation:

A natural monopoly is a monopoly in an industry in which huge infrastructural costs and other fences to entry relative to the size of the market give the largest supplier in an industry, often the first supplier in a market, an overwhelming advantage over potential competitors.  

(i) multiple firms would likely each have to pay large fixed costs to develop their own network of pipes. This is true but often times it is just one big company the one that serves the whole market or a partnership of two or (rarely) three companies that works as a big company.

(iii) a single firm can serve the market at the lowest possible average total cost.  This is true because a natural monopoly has scale economies that's why it can offer the lowest possible average total costs.