If a market is contestable, then
A)long-run economic profits are minimal due to inefficiency.
B)long-run economic profits are zero.
C)short-run and long-run economic profits are zero.
D)positive economic profits are maximized due to the efficient production spurred by the threat of entry.

Question

Quizplus · Accepted Answer

If a market is contestable, it means that there are low barriers to entry and exit, which makes it possible for new firms to enter and compete with existing ones. In such a market, the threat of entry is enough to discipline existing firms and prevent them from earning sustained economic profits. Therefore, in the long run, economic profits are expected to be zero. While short-run profits may be positive, the absence of entry barriers implies that these will be competed away in the long run.

If a Market Is Contestable, Then