Under what condition does a natural monopoly (natuurlijk monopolie) typically develop in an industry?
Answer and explanation
Correct answer: A. When economies of scale allow a single firm to supply the entire market at lower cost than multiple firms
- Step 1: A natural monopoly arises in industries with massive fixed infrastructure costs and declining average total costs (e.g., railway tracks, electricity grids, water mains). Step 2. Having multiple competing networks would duplicate enormous capital costs and be economically inefficient. Answer: When economies of scale allow a single firm to supply the entire market at lower cost than multiple firms. Why not the others: Legal monopolies arise from statutory decrees or patents; natural monopolies stem from cost structure.
Practise more Microeconomics: Markets, Elasticity and Consumer Choice.
Free questions with an explanation for every one, and full timed VWO / HAVO Centraal Examen (Netherlands) mock tests.
More Microeconomics: Markets, Elasticity and Consumer Choice questions
- What does a price elasticity of demand () equal to indicate about consumer responsiveness to a price change?
- What happens to the total revenue of a firm when it increases the selling price of a product with price-inelastic demand ()?
- Which market structure is characterized by many sellers offering differentiated products with low barriers to entry and non-price competitio…
- What is the cross-price elasticity of demand () between two goods that are substitutes, such as butter and margarine?
- What is the profit-maximizing output condition for a firm operating under perfect competition?
- What is the economic definition of consumer surplus (consumentensurplus)?