1.7 Comparative and Absolute Advantage

Question 8 • FL-2102340-Economics with Financial Literacy (Teacher Directed)

Which statement is the best definition of a natural monopoly?

Answer

It is a monopoly that only relates to the use and distribution of water, coal, and other natural resources.

It happens when one business can provide a product at a cheaper cost than two or more businesses can.

It is a monopoly that cannot be controlled by the government and exists outside any form of regulation.

It happens when one business buys out others to dominate a market and control the creation of a product.

Explanation

A natural monopoly exists when one firm can serve the whole market at a lower cost than multiple competing firms. This often happens when providing the service requires large fixed costs, such as building a utility network. Choice B gives this cost-based definition; choice A incorrectly limits the term to natural resources.

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1.7 Comparative and Absolute Advantage