A natural monopoly is most likely to occur in which of the following industries?
A)the pharmaceutical industry because the development and approval of new drugs through the Food and Drug Administration can take more than 10 years
B)the diamond mining and marketing industry because one firm can control a key resource
C)the software industry because of the importance of network externalities
D)an industry where fixed costs are very large relative to variable costs

Question

Quizplus · Accepted Answer

A natural monopoly occurs when fixed costs are very large relative to variable costs. This means that the cost of producing an additional unit of output is very low once the fixed costs have been incurred. This tends to occur in industries where significant infrastructure or other capital investments are required, such as utilities or telecommunications. Therefore, option D is the most likely industry to experience natural monopoly.

A Natural Monopoly Is Most Likely to Occur in Which