In a market with a natural monopoly, at what price does the monopolist typically meet market demand in order to maximize profit?

• A. At the price where demand equals supply
• B. At the price where average revenue equals average cost
• C. At the price where marginal cost equals marginal revenue
• D. At the price where marginal cost equals average cost

Answer: (C)

Verified step by step guidance

1. Understand that a natural monopoly occurs when a single firm can supply the entire market at a lower cost than multiple firms, often due to economies of scale.
2. Recall that a monopolist maximizes profit by producing the quantity where marginal revenue (MR) equals marginal cost (MC). This is a fundamental rule in microeconomics for profit maximization.
3. Recognize that the price the monopolist charges is determined by the demand curve at the profit-maximizing quantity, not necessarily where demand equals supply or where average revenue equals average cost.
4. Note that average revenue (AR) equals price, and average cost (AC) relates to the cost per unit, but profit maximization depends on the equality of MR and MC, not AR and AC.
5. Therefore, the monopolist sets the price corresponding to the quantity where \(\text{MR} = \text{MC}\) to maximize profit, which is typically above marginal cost in a natural monopoly.