When a market is contestable, incumbent firms must __________ to avoid the entry of new competitors?
Correct answer: A. behave like competitive firms
- A. behave like competitive firms
- B. agree to act together
- C. differentiate their products
- D. practice price discrimination
Explanation
Contestable markets have low barriers to entry and exit, so incumbent firms must keep prices and conduct close to competitive levels to deter potential entrants. Cooperation, product differentiation, or price discrimination is not the general requirement.
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Individual consumers, firms and markets are examined through demand and supply, elasticity, consumer choice, production, costs, revenue and the determination of prices and output. The topic also covers market structures such as perfect competition, monopoly and oligopoly, plus market failure, externalities and the distinction between microeconomic decisions and economy-wide outcomes.
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