In a contestable market,
A) Product differentiation results in nonprice competition as well as price competition.
B) There are economies of scale that heighten competition.
C) Barriers to entry and long-run economic profits are low.
D) Many firms compete in producing a standardized product.

Question

Quizplus · Accepted Answer

In a contestable market, there are low barriers to entry and exit, which means that new firms can easily enter and compete with existing firms. This competition keeps long-run economic profits low, as firms cannot simply raise prices without risking losing customers to new entrants. Therefore, choice C is correct. Choices A, B, and D do not accurately describe contestable markets. Product differentiation may still exist, but it is not a defining characteristic of contestable markets. Furthermore, there may or may not be economies of scale in a contestable market, and firms may produce a standardized product or a differentiated one.

In a Contestable Market