If a market is contestable, then
A)a cartel will form in the industry.
B)economic profits are small or zero.
C)firms face a vertical demand curve.
D)there is a dominant firm in the market.

Question

Quizplus · Accepted Answer

In a contestable market, the threat of entry by potential competitors keeps existing firms from earning large economic profits. This is because any firm that tries to charge a high price or earn large profits will attract new entry, which will increase competition and reduce profits. Therefore, economic profits are small or zero in a contestable market. A, C, and D are not necessarily true in a contestable market.

If a Market Is Contestable, Then