When economies of scale limit the number of firms in an industry to 3,there is a
A) natural monopoly.
B) natural oligopoly.
C) legal oligopoly.
D) legal cartel.
E) natural monopolistic competition.

Question

Quizplus · Accepted Answer

An oligopoly is a market structure in which a few large firms dominate the industry. When economies of scale limit the number of firms in an industry to 3, it creates a situation known as a natural oligopoly. In this situation, the few large firms in the industry have a significant share of the market and can influence market prices. Therefore, B (natural oligopoly) is the best choice. A (natural monopoly) is not appropriate because three firms are not one firm. C (legal oligopoly) and D (legal cartel) are not appropriate because they refer to situations created by government laws or regulations, while the scenario given in the question is a result of market forces. E (natural monopolistic competition) is not appropriate because monopolistic competition implies that there are many firms in the industry, not just three.

When Economies of Scale Limit the Number of Firms in an Industry