1)A common complaint is that a new car will depreciate by 25% as soon as the new owner drives it off the lot. This information comes from resale price data from cars sold just months after the initial purchase. How does adverse selection imply that most cars depreciate much less?

2)Why is marginal cost always below average cost for natural monopolies?

1)Adverse selection means that undesirable results occur when there is asymmetric information. In turn, asymmetric information means that one party to a contract has more or better information than the other. In the example, it has been found that cars sold quickly after purchase suffer about 25% depreciation. That is known to the dealer, and perhaps also to the purchaser. The asymmetric information may come into play because the new owner/driver does not expect to hold the asset for only a few months, and so may not be aware of the sizeable amount of depreciation that occurs very early in the useful life of an asset such as a personal vehicle.

2)Natural monopolies have a large number of fixed costs. The average total cost is decreasing as more outputs are produced and sold. This is because more fixed costs are absorbed by more outputs. Marginal cost is also decreasing but below the average cost. Marginal cost is the increase in cost for producing an additional unit. Since fixed cost is constant, the marginal cost is dependent on the change in variable cost. Natural monopolies have a characteristic of having a high fixed cost than variable cost. Therefore, the marginal cost does not change greatly.