In a perfectly contestable market, in the long-run, firms will make . This is due to in a perfectly contestable market. In long-run equilibrium in a perfectly contestable market, price will be marginal cost.

In a perfectly contestable market, in the short-run firms are operating where marginal cost equals marginal revenue and price is above marginal cost. Which one of the following is the long-run outcome?

Potential entrants will enter the market and price will be driven down to below marginal cost. All firms in the market will earn subnormal profits

Potential entrants can enter the market offering a slightly lower price and still make abnormal profit. This process will continue until the abnormal profits are competed away.

Potential entrants will seek to enter but incumbent firms will react quickly and adjust their product offering to make it impossible for new firms to enter and compete away abnormal profits

Potential entrants will not be able to enter the market as they cannot produce a product close enough in cost and specification to be a competitor and so abnormal profits will continue to exist