A single firm selling its output in a contestable market will

Question

Quizplus · Accepted Answer

In a contestable market, barriers to entry and exit are low, making it easy for new firms to enter and existing firms to leave the market. This means that a single firm selling its output in a contestable market will be threatened constantly by the entry of new firms, as these entrants can easily undercut the incumbent firm's prices or offer better quality products, eroding the incumbent firm's market share and profits. Thus, Option D is the correct answer. Option A is incorrect because a single firm cannot establish a monopoly in a contestable market due to low barriers to entry. Option B is incorrect because a single firm cannot maintain high prices indefinitely in a contestable market due to the threat of new entrants undercutting its prices. Option C is incorrect because a single firm cannot earn high economic profits indefinitely in a contestable market due to the threat of new entrants entering the market and decreasing the incumbent firm's market share and profit margins.

A Single Firm Selling Its Output in a Contestable Market