Lesson 3.4.7
3.4.7 Contestability Quiz: Pearson Edexcel Economics, Unit 3
20 questions
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Lesson 3.4.7, Contestability: 20 multiple choice questions for the Pearson Edexcel Economics (9EC0), Unit 3: Theme 3: Business behaviour and the labour market, written with Revision Ninja.
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The 20 questions
-
What is the defining characteristic of a contestable market?
- High sunk costs
- Price taking
- No entry barriers
- Single supplier
-
What is the term for costs that cannot be recovered when a firm leaves a market?
- Fixed costs
- Sunk costs
- Marginal costs
- Variable costs
-
How might a monopoly react to the threat of hit-and-run entry in a contestable market?
- Reduce output
- Lower prices
- Raise prices
- Merge with rivals
-
What happens to market contestability when sunk costs are extremely low?
- Monopoly power grows
- Contestability is unaffected
- Contestability increases
- Contestability decreases
-
Which of the following is a legal barrier to entry into a market?
- Patents
- Economies of scale
- Advertising budgets
- High sunk costs
-
Which market typically has the highest degree of contestability due to low sunk costs?
- Taxi services
- Rail infrastructure
- Pharmaceuticals
- Water supply
-
Why would a monopolist set prices near average cost in a highly contestable market?
- Force vertical integration
- Maximise profit margins
- Prevent hit-and-run entry
- Increase fixed costs
-
Which condition is essential for a new firm to execute hit-and-run entry?
- Significant scale economies
- Low sunk costs
- High legal barriers
- High start-up costs
-
Which factor acts as a major barrier to exit for a firm leaving a market?
- Low fixed costs
- Non-refundable sunk costs
- High product demand
- Availability of patents
-
What effect do high sunk costs have on the degree of market contestability?
- Eliminates fixed costs
- Increases contestability
- Guarantees allocative efficiency
- Reduces contestability
-
Which feature acts as a statutory legal barrier to market entry?
- Economies of scale
- Commercial licences
- High advertising spend
- Predatory pricing
-
What effect does granting an exclusive government licence have on market contestability?
- Eliminates sunk costs
- Promotes perfect competition
- Decreases contestability
- Increases contestability
-
What pricing strategy involves setting prices low enough to deter new firms from entering?
- Peak-load pricing
- Price discrimination
- Limit pricing
- Cost-plus pricing
-
Which industry is usually considered the least contestable due to massive infrastructure costs?
- Hairdressing
- Coffee shops
- Railway networks
- Fast food
-
Why might a firm in a contestable market still suffer from X-inefficiency?
- Perfect information
- Legal entry barriers
- High sunk costs
- Lack of actual rivals
-
How does high market contestability affect the need for state price regulation?
- Increases regulation need
- Forces nationalisation
- Reduces regulation need
- Prevents market entry
-
What determines market discipline in a contestably competitive market?
- Market share
- Firm numbers
- Potential entry
- Collusion level
-
What is the net financial loss if an entrant incurs £2m sunk costs and £450,000 profit?
- £2 million
- £2.45 million
- £450,000
- £1.55 million
-
Which factor directly reduces the degree of contestability in a market?
- High sunk costs
- Low entry barriers
- Perfect information
- Homogeneous products
-
What enables new entrants to overcome an incumbent's large sunk cost advantage?
- Higher prices
- Minimum wages
- Technological innovation
- Increased tariffs
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