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 to take advantage of abnormal profits and price will be driven down such that price will equal marginal cost

Potential entrants will seek to enter the market but will find that the exit costs will be a barrier to entry and so the market will continue to be oligopolistic

Incumbent firms will erect barriers to entry to prevent potential entry to the market and existing firms in the market will continue to make abnormal profits

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