Contestability

What is a key requirement for a contestable market to exist?

• High barriers to entry
• Low barriers to entry and exit
• Limited competition
• Monopolistic control

According to the theory of contestable markets, what do firms earn in the long run?

• Supernormal profits
• Abnormal profits
• Normal profits
• Losses

How does contestable market theory differ from neo-classical theory in terms of competition?

• Focus on the number of firms
• Emphasis on barriers to entry and exit
• High entry costs are beneficial
• Perfect knowledge is not necessary

What role do sunk costs play in creating barriers to market contestability?

• They encourage hit and run competition
• They deter new entrants
• They reduce the risks for new firms
• They have no impact on contestability

What is the relationship between supernormal (abnormal) profits and new entrants in a contestable market?

• Supernormal profits attract new entrants

• Supernormal profits repel new entrants

• Supernormal profits have no impact on entry

• Supernormal profits only occur in the long run

Florence started a new business and Max noticed that there are more businesses like hers popping up in recent years. What could be one reason for this increasing contestability of markets?

• Higher barriers to entry

• Economic downturns

• Market monopolisation

• Decreased entrepreneurial spirit

How can de-regulation contribute to increased contestability in markets?

• By reducing competition
• By imposing stricter entry barriers
• By opening up markets to new businesses
• By limiting product innovation

Amelia, Emily, and Sebastian are running a business in their home country. They are considering expanding their business to other European countries. What effect does joining a trading bloc have on their business's market contestability?

• It increases barriers to entry for their business

• It decreases competition for their business

• It opens up markets for their business in member nations

• It promotes their business to form price-fixing cartels

How does technological change impact market contestability?

• It raises entry costs
• It decreases capital mobility
• It reduces barriers to entry
• It discourages product innovation

Ava, Grace, and Eesha are planning to start a new business in a market with low barriers to entry. What characteristic can they expect from this market?

• Limited capital mobility

• Weak contestability

• Increased risk for new entrants

• High degrees of contestability