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2 The Theory of Natural Monopoly and Lit... > Efficient Industry Structure - Pg. 21

Efficient Industry Structure Given that there are two possible solutions, which are displayed in Figure 2.3, a sufficient condition must be established. Marginal cost equals marginal revenue at Y 1 and Y 2 . Clearly, at output level Y 1 , marginal cost exceeds marginal revenue, which results in a loss to the firm, not a profit. At any Y such that Y 1 < Y < Y 2 , marginal revenue exceeds marginal cost so that profit is being earned. Also, at Y 2 , the entire profit is captured by the firm. What is the sufficient condition? That marginal cost must be rising faster than marginal revenue, or, as displayed in Figure 2.3, it must be the case that marginal cost is rising faster than marginal revenue. In other words, the derivative of marginal cost with respect to output is higher than the derivative of marginal revenue, which is expressed as MCðYÞ Y > M RðYÞ Y, that is, Y > ðc - BÞ 3d: (2:14) (2:13) 21 These cost concepts are used extensively throughout the economics literature and are revisited in subsequent chapters.