Which of the following is true of a natural monopoly?

• A. It is characterized by many firms competing in the market.
• B. It experiences declining average total costs over a wide range of output.
• C. It faces perfectly elastic demand for its product.
• D. It can only exist if government regulation prohibits entry.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the definition of a natural monopoly. A natural monopoly occurs when a single firm can supply the entire market demand at a lower cost than multiple firms could, due to economies of scale over a wide range of output.
2. Step 2: Recognize that a natural monopoly is characterized by declining average total costs (ATC) as output increases. This means the firm's ATC curve slopes downward over the relevant range of production.
3. Step 3: Analyze the options given: 'many firms competing' contradicts the idea of a natural monopoly, which typically has one dominant firm due to cost advantages.
4. Step 4: Consider the demand elasticity faced by a natural monopoly. It usually faces a downward-sloping demand curve, not a perfectly elastic one, because it is the sole supplier in the market.
5. Step 5: Understand that a natural monopoly can exist without government regulation prohibiting entry; it arises naturally from cost structures, although regulation may be applied to control prices or output.