Which of the following statements is most accurate regarding the theory of contestable markets? A) An industry’s barriers to entry and exit must be high in order to have competitive pricing among the low cost producers of the industry. B) The greater the number of industry participants, the more competitive the pricing. C) If an industry has low barriers of entry and exit, the number of market participants does not affect pricing competitiveness in an industry.
oof. i think contestable mkts, i automatically want to go to the answer that says low barriers to entry/exit. B sounds good, but not so specific to contestable. i’ll go C.
C? - as low barriers entry, prices are at average cost because many competitors are already there and won’t matter if participants increase or decrease now. BTW, what is contestable market?
B
wangta01 Wrote: ------------------------------------------------------- > B not necessary. Govt might have put some regulation that existing companies cannot charge higher prices.
Gotta be C
Definitely NOT A Need a definition of contestable markets.
Your answer: B was incorrect. The correct answer was C) If an industry has low barriers of entry and exit, the number of market participants does not affect pricing competitiveness in an industry. If there are low barriers to entry and exit in an industry and pricing inefficiencies occur, participants will enter the industry, thus increasing pricing competitiveness and restoring pricing equilibrium. Therefore, under the theory of contestable market, pricing will remain competitive, regardless of the number of market participants.
C
cfaboston28 Wrote: ------------------------------------------------------- > wangta01 Wrote: > -------------------------------------------------- > ----- > > B > > > not necessary. Govt might have put some regulation > that existing companies cannot charge higher > prices. Hmm, true but that could apply to C too.
In economics, a contestable market is a market served by only one firm, but with mandated “competitive” pricing, so as to second the monopoly held by said firm on said market. Its fundamental feature is low barriers to entry and exit; a perfectly contestable market would have no barriers to entry or exit. Contestable markets are characteristed by ‘hit and run’ entry. If a firm in a market with no entry or exit barriers raises its prices above marginal cost and begins to earn abnormal profits, potential rivals will enter the market to take advantage of these profits. When the incumbent firm(s) respond by returning prices to levels consistent with normal profits the new firms will exit. In this manner even a single-firm market can show highly competitive behaviour.
Thanks Banni…and C it is. Looks like a lot of people are studying at work!
bannisja Wrote: ------------------------------------------------------- > In economics, a contestable market is a market > served by only one firm, but with mandated > “competitive” pricing, so as to second the > monopoly held by said firm on said market. Its > fundamental feature is low barriers to entry and > exit; a perfectly contestable market would have no > barriers to entry or exit. Contestable markets are > characteristed by ‘hit and run’ entry. If a firm > in a market with no entry or exit barriers raises > its prices above marginal cost and begins to earn > abnormal profits, potential rivals will enter the > market to take advantage of these profits. When > the incumbent firm(s) respond by returning prices > to levels consistent with normal profits the new > firms will exit. In this manner even a single-firm > market can show highly competitive behaviour. Thanks.
d-day is near must sneak in study at every possible moment
Bannisja is awesome, I definitely believe you would be heading to victory on D-day