Which of the following average cost curves best characterizes a natural monopoly?

• A. An average cost curve that is flat and constant at all output levels
• B. An average cost curve that is U-shaped, reaching a minimum at moderate output
• C. An average cost curve that is upward-sloping as output increases
• D. A downward-sloping average cost curve over the entire range of output

Answer: (D)

Verified step by step guidance

1. Understand the concept of a natural monopoly: it occurs when a single firm can supply the entire market demand at a lower cost than multiple firms, typically due to economies of scale over a large range of output.
2. Recall that the average cost (AC) curve shows the cost per unit of output at different production levels, and its shape reflects how costs change as output changes.
3. Analyze the options: a flat AC curve means constant costs per unit, a U-shaped AC curve means costs decrease then increase, and an upward-sloping AC curve means costs increase with output.
4. Recognize that a natural monopoly is characterized by a downward-sloping average cost curve over the relevant output range, indicating that average costs decrease as output increases, which supports a single firm serving the market efficiently.
5. Conclude that the correct average cost curve for a natural monopoly is the one that slopes downward over the entire range of output, reflecting continuous economies of scale.