Question

Suppose that a perfectly competitive firm is earning a positive accounting profit, but there is no incentive for other firms to enter or exit the industry.

Name any TWO (2) possible reasons that support the above scenario?

Answer 1

There is an entry or exit only when there strong incentives exist in the market for such an action. in this case there is positive accounting profit but it is highly likely that there are no economic profits or losses. Because of these there is no incentive to enter or exit.

It is also possible that there is a some regulation in the market in that a firm has to bear certain transaction cost if it enters or exit the market. This is going to reduce the accounting profit and hence firms are not willing to exit or enter.