Reading 15- LOS e ～ Q1－2

1.Which of the following statements is most accurate regarding the theory of contestable markets?
A)    The greater the number of industry participants, the more competitive the pricing.
B)    Increased regulation in an industry results in more competitive pricing and fewer barriers to entry.
C)    If an industry has low barriers of entry and exit, the number of market participants does not affect pricing competitiveness in an industry.
D)    An industry’s barriers to entry and exit must be high in order to have competitive pricing among the low cost producers of the industry.
The correct answer was C)
If there are low barriers to entry and exit in an industry and pricing inefficiencies occur, participants will enter the industry, thus increasing pricing competitiveness and restoring pricing equilibrium. Therefore, under the theory of contestable market, pricing will remain competitive, regardless of the number of market participants.

2.Which of the following statements most accurately describes a benefit of deregulation?
A)    The effects of the capture hypothesis will no longer exist, resulting in decreased prices for consumers.
B)    When government-mandated barriers to entry and exit are eliminated, an industry will become more competitive.
C)    The removal of government-imposed guidelines will lead to a decrease in unemployment, because firms will experience lower labor expenses.
D)    Unions will have increased power in the deregulated industry, thus providing greater protection for its workers.
The correct answer was B)
Removal of barriers will lead to new entrants into the industry, and prices will decrease toward the producers’ average costs, eliminating any excess profits that exist under regulation.