Question

When an increase in a network's membership increases the product's value to users, there are

	a.	network externalities.
	b.	natural monopolies.
	c.	diminishing costs.
	d.	economies of scale.

Answer 1

An increase in production due to an increase in the scale of production is the benefits arising out of economies of scale. Economies of scale refer to the cost advantage to the firm when it increases the level of output. In the given case, you can see that the value of the product is not associated with the cost of managing membership rather the benefits arising out of having a bigger network. An increase in the network's membership is a valuable advantage to the members rather than the cost advantage.

Thus, an increase in the product's value to users due to an increase in a network's membership would be network externalities.

Thus, Option A is the correct answer.