A Level Economics AQA Practice Exam

What are barriers to exit in an industry?

1. Conditions that facilitate market exit

2. Factors making it hard for firms to leave

3. Regulations that encourage market entry

4. Profit potential in a declining market

The correct answer is: Factors making it hard for firms to leave

Barriers to exit in an industry refer to factors that make it difficult for firms to leave the market. These can include high sunk costs, contractual obligations, and potential losses that a firm would incur if it decided to exit. When firms face significant barriers to exit, they may remain in an unprofitable market longer than is economically efficient, as leaving could result in substantial financial losses. Understanding these barriers is important for analyzing market dynamics and firm behavior in different industry contexts. Other options do not accurately represent the concept. Conditions that facilitate market exit imply ease of leaving, which is opposite to the definition of barriers to exit. Regulations encouraging market entry focus on new firms entering a market rather than those exiting. Profit potential in a declining market may indicate a reason for some firms to stay, but it does not encompass the inherent difficulties associated with exiting.