A distinct characteristic of a natural monopoly is that

• A. Legal barriers to entry form its existence
• B. It has no close substitutes
• C. Its average total cost curve slopes downward as it intersects the demand curve
• D. It faces a downward-sloping demand curve

Answer: (C)

Verified step by step guidance

1. Understand the concept of a natural monopoly: A natural monopoly occurs when a single firm can supply the entire market at a lower cost than any combination of two or more firms. This typically happens due to economies of scale.
2. Identify the key feature of a natural monopoly: The average total cost (ATC) curve slopes downward over the range of market demand. This means that as the firm produces more, the average cost per unit decreases.
3. Recognize the implication of the ATC curve intersecting the demand curve: When the ATC curve intersects the demand curve while still sloping downward, it indicates that the firm can meet the entire market demand at a lower cost than any potential competitors.
4. Differentiate from other characteristics: While legal barriers and lack of substitutes can be features of monopolies, the defining characteristic of a natural monopoly is the downward-sloping ATC curve intersecting the demand curve.
5. Consider the market dynamics: A natural monopoly is often regulated by the government to prevent the firm from exploiting its position, as it can set prices above competitive levels due to lack of competition.