5)Explain why each one of the following is (or is not) important to Contestabili

Question

5)Explain why each one of the following is (or is not) important to Contestability a) All producers have access to the same technology. · b) Consumers respond quickly to price changes. · c) Existing firms cannot respond quickly to entry by lowering price. · d) Sunk costs exceed expected profits. 6.What is the importance of a sunk cost in terms of a contestable market? 7. In a perfectly contestable market, firms will set prices because of the threat of new entrants. A. high B. low C. medium and Why?

Explanation / Answer

5. a. It is important to contestability that all producers have access to the same technology. If a firm has the acess of right tachnology and other oponent firm does not have that, then this difference makes the market less contestable. Differences in technology brings the differentiation in products and its quality.

b. If consumers respond to price change immediately, then also it makes the market contestable. If consumers changes their quantity demanded quickly to the price change, then the market becomes highly competitive. Firms often engage in price war. A small change in price would lead to quick shift in demand. Therefore, low cost firm would be able to make greater profit in this market structure in comparison to the high cost firm.

C. It is not important for the contestability if the existing firms cannot lower the product price immediately as the existing firms operate by increasing their brand loyalty and advertising as it has already the economies of scale.

d. Sunk costs are important for a contestable market, if the sunk cost exceeds the profit, it would result in loss and make the market less contestable especially for the new firms entering into the market.

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