If in a given market of more than one producer, there were to exist for a long interval of time a positive gap between price and average cost (P AC), this would suggest that
A)there are many sellers in the industry.
B)there exists an oligopoly or cartel in the industry.
C)this is a contestable market.
D)the firm cannot be a monopolistic competitor.

Question

If in a given market of more than one producer, there were to exist for a long interval of time a positive gap between price and average cost (P > AC), this would suggest that
A)there are many sellers in the industry.
B)there exists an oligopoly or cartel in the industry.
C)this is a contestable market.
D)the firm cannot be a monopolistic competitor.

Quizplus · Accepted Answer

A positive gap between price and average cost suggests that the firm is earning economic profits. In a perfectly competitive market, economic profits cannot be sustained in the long run because new firms will enter the market and drive down the price. Therefore, the presence of such profits over a long interval suggests that there are barriers to entry, such as an oligopoly or cartel controlling the market.

If in a Given Market of More Than One Producer