According to the contestable markets theory,
A)even if an industry is comprised of a small number of firms, this is not sufficient evidence that the firms perform in a noncompetitive way.
B)profits cannot be zero in an industry if the number of sellers in the industry is small.
C)if a market is contestable, inefficient producers are more likely to survive than if the market is not contestable.
D)profits cannot be zero in an industry if the number of sellers in the industry is large.

Question

Quizplus · Accepted Answer

According to the contestable markets theory, the number of firms in an industry alone does not determine its competitiveness. Even if there are only a few firms, if the market is contestable, new firms can enter and compete with existing firms, driving down prices and ensuring that firms cannot maintain above-normal profits in the long run. Therefore, option A is correct. Option B is incorrect because the theory suggests that profits can be zero in an industry regardless of the number of sellers. Option C is also incorrect because the theory suggests that inefficient producers are more likely to exit the market in a contestable market, not survive. Option D is incorrect because the number of sellers does not determine whether profits can be zero or not, as explained in the explanation for option B.

According to the Contestable Markets Theory