Question

Entry to and exit from a ____ market are ____.

A. oligopolistic; easy

B. perfectly contestable; difficult

C. perfectly contestable; easy

D. perfectly competitive; difficult

Answer 1

Answer: C. Perfectly contestable, easy.

In an oligopoly market there are barriers to the entry of new firms. These barriers are created largely through patent rights and the need of large scale investment.

But in a perfectly contestable market, there is no sunk cost and the technology is easily available to the new firms. Thus no barriers to the entry of new firms and exit of existing firms. In this market there is hit and run competition as a firm temporarily enters into the market and leaves the market when the supernormal profit exhausted. But in a perfectly competitive market, there is maximum freedom of entry and exit, but the firms run the business even if the firms incur loss. The loss suffering firms exit only in longrun and new firms enter into the market only in longrun. There is no instant entry and exit of new firms.