Define natural monopoly. Draw the demand, marginal revenue, marginal cost, and average cost curves for a natural monopoly.
a. What does the size of a market have to do with whether an industry is a natural monopoly?
b. What are the two problems that arise when the government regulates a natural monopoly by limiting price to be equal to marginal cost?
c. Suppose that a natural monopoly is required to charge average total cost. On your diagram, label the price charged and the deadweight loss to society relative to marginal cost pricing.