Final answer:
In the Nash Equilibrium for a contestable market with a potential entrant and Adkins Air, the potential entrant would choose not to enter the market and Adkins Air would earn a normal profit as a strategic response to prevent new competition.
The correct option is c. does not enter and Adkins earns a normal profit.
Step-by-step explanation:
The student's question is pertaining to a market scenario where Adkins Air is currently the sole provider of direct flights from Milwaukee to Greensboro. This market is considered contestable because the cost of entry and exit for firms is low, allowing for potential competition. In a Nash Equilibrium of this contestable market, we must consider the actions of both Adkins Air and the potential entrant. The presented scenario implies that if a new entrant considers entering the market, Adkins Air would likely lower prices to a point where the new entrant cannot sustain itself financially.
Considering this strategic response, the new entrant's best strategy would be to not enter the market, understanding it could not make a profit due to Adkins Air's pricing strategy. Thus, in the Nash Equilibrium of this game, This is because if Adkins Air drove the new entrant out of the market, they could temporarily raise prices to earn an economic profit, but the threat of new entrants would prevent long-term supra-normal profits. Therefore, Adkins Air would settle at a price point where it earns just a normal profit ensuring it does not attract new entrants.
The correct option is c. does not enter and Adkins earns a normal profit.