In a Contestable Market with One Firm in the Market

question 127

Multiple Choice

In a contestable market with one firm in the market, the existing firm will

• A) set its price equal to the monopoly price.
• B) set its price lower than the monopoly price.
• C) set its price higher than the monopoly price.
• D) have a demand curve that is horizontal at the price that will attract new firms to enter the market.

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Definitions:

Lease Liability

An obligation representing the present value of future lease payments a lessee is committed to make under a lease agreement.

Cost of Capital

The rate of return that a firm must earn on its project investments to maintain its market value and attract funds.

Residual Value

The estimated value that an asset will realize upon its sale at the end of its useful life.

Capital Lease

A lease agreement that qualifies as a purchase of an asset for accounting purposes, because it substantially transfers all the benefits and risks of ownership to the lessee.