In a contestable market with one firm in the market, the existing firm will
A) set its price equal to the monopoly price.
B) set its price lower than the monopoly price.
C) have a demand curve that is horizontal at the price that will attract new firms to enter the market.
D) set its price higher than the monopoly price.

Question

Quizplus · Accepted Answer

In a contestable market, the threat of potential entry by new firms forces the existing firm to set its price lower than the monopoly price to deter entry. This is because if the price were set at the monopoly level, it would be profitable for new firms to enter the market, thus the existing firm lowers its price to make entry less attractive.

In a Contestable Market with One Firm in the Market