An important condition for a contestable market is:
A) all producers have different technologies.
B) there are high transaction costs.
C) existing firms cannot respond quickly to entry by lowering their price.
D) there are sunk costs.

Question

Quizplus · Accepted Answer

A contestable market is characterized by the absence of barriers to entry and exit, which allows new firms to enter and compete with existing firms. In order for this competition to occur, existing firms must not be able to respond quickly to entry by lowering their prices, as this would deter new firms from entering. Thus, choice C is the most important condition for a contestable market. Choices A, B, and D may influence market contestability, but they are not essential conditions for a market to be contestable.

An Important Condition for a Contestable Market Is