Author Question: If a market is contestable, how does the equilibrium differ from that of a monopoly? What will be ... (Read 37 times)

nummyann · **on:** Jun 29, 2018

If a market is contestable, how does the equilibrium differ from that of a monopoly?

What will be an ideal response?

Question 2

Refer to Figure 3-8. The graph in this figure illustrates an initial competitive equilibrium in the market for apples at the intersection of D1 and S2 (point B). Which of the following changes would cause the equilibrium to change to point C?

A) a positive change in the technology used to produce apples and decrease in the price of oranges, a substitute for apples
B) an increase in the wages of apple workers and an increase in the price of oranges, a substitute for apples
C) an increase in the number of apple producers and a decrease in the number of apple trees as a result of disease
D) a decrease in the wages of apple workers and an increase in the price of oranges, a substitute for apples

diana chang · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

A contestable market occurs when the firms in a market face potential entry from other firms due to low barriers to entry. While a monopoly free from the threat of entry will charge a high price and maximize economic profit, the firm or firms in a contestable market will keep price low and quantity produced high to deter potential entry by other firms outside the market. This benefits consumers, who enjoy near-competitive levels of output and a competitive market price.

Answer to Question 2

A