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 one firm can produce the entire output of the market at a lower cost than two or more firms can achieve. An industry where fixed costs are very large relative to variable costs is more likely to have a natural monopoly because the fixed costs of establishing a production facility are so high that it is more efficient for one firm to produce the entire output. The other options, pharmaceuticals, diamond mining and marketing, and software industry, may have barriers to entry, but they do not necessarily lead to a natural monopoly.

A Natural Monopoly Is Most Likely to Occur in Which