Adkins Air is the only seller offering service directly from Melbourne to Bendigo. The market is contestable. Thus the Nash Equilibrium for a game between Adkins Air and a potential entrant is when the potential entrant
A) does not enter and Adkins earns a normal profit.
B) does not enter and Adkins earns an economic profit.
C) enters and Adkins earns a normal profit.
D) enters and Adkins earns an economic profit.

Question

Quizplus · Accepted Answer

In a contestable market, the threat of entry by potential competitors ensures that the incumbent firm, Adkins Air in this case, sets prices at a level where it earns only a normal profit. If Adkins were to earn an economic profit, it would attract entry by competitors. Therefore, the Nash Equilibrium is when the potential entrant does not enter the market because Adkins Air is only earning a normal profit, making entry unattractive.

Adkins Air Is the Only Seller Offering Service Directly from Melbourne