Question

A contestable market is one in which there are

A) one or a few firms and entry into the market is costly.

B) one or a few firms and entry into the market is not costly.

C) many firms and entry into the market is costly.

D) many firms and entry into the market is not costly.

Answer 1

Option B.

• A contestable market is a market structure characterized by a single or a few firms and freedom of entry and exit.
• It sometimes act as a monopoly when it has a firm firm or acts as a competitive market with few producers.
• These markets provide free entry of firms in the market which makes it relatively cheaper for firms to enter and exit the market.
• Due to the decreased cost of entry and exit, the firms enter into the market when the Market is making profits and leave the market when it is facing losses.