ease of presentation.)

The first possibility is to leave the natural monopoly alone. In this case, the monopoly will follow its normal

approach to maximizing profits. It determines the quantity where MR = MC, which happens at point P at a

quantity of 4. The firm then looks to point A on the demand curve to find that it can charge a price of 9.3 for

that profit-maximizing quantity. Since the price is above the average cost curve, the natural monopoly would

earn economic profits.

A second outcome arises if antitrust authorities decide to divide the company, so that the new firms can

compete. As a simple example, imagine that the company is cut in half. Thus, instead of one large firm

producing a quantity of 4, two half-size firms each produce a quantity of 2. Because of the declining average

cost curve (AC), the average cost of production for each of the half-size companies producing 2, as point B
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