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In Sicily, many households can grow lemons of the same quality as each other - Edexcel - A-Level Economics A - Question 5 - 2021 - Paper 1
Question 5
In Sicily, many households can grow lemons of the same quality as each other. Chiara decides to sell lemons at her local market, expecting to make a normal profit. S... show full transcript
Worked Solution & Example Answer:In Sicily, many households can grow lemons of the same quality as each other - Edexcel - A-Level Economics A - Question 5 - 2021 - Paper 1
Step 1
Draw diagrams showing the equilibrium positions for both the lemon market and a typical firm in the long run.
Answer
To illustrate the equilibrium positions, two diagrams are required.
Lemon Market Diagram
- Draw a downward sloping demand curve (D) and an upward sloping supply curve (S).
- Locate the equilibrium price (P_x) where the demand and supply curves intersect, representing the market price for lemons.
- Label the quantity at equilibrium (Q_x) on the horizontal axis.
Typical Firm Diagram
- Draw the Average Total Cost (ATC) curve, which is U-shaped, and the Marginal Cost (MC) curve, which intersects the ATC curve at its lowest point.
- Illustrate the demand curve (D), which is horizontal at the market price level (P_x), indicating a perfectly competitive firm.
- Identify the output level (Q_f) where MR=D=AR=P and the profit-maximizing condition (MC=MR) holds. The area above the ATC and below the price will represent normal profit at this output level.
Step 2
Which one of the following will exist in the short run if Chiara makes a loss?
Answer
In the short run, if Chiara makes a loss, the correct answer is B: Allocative efficiency and productive inefficiency.
Explanation:
- A is incorrect because the firm is not operating at its minimum point on the AC curve, hence not optimizing production.
- C is incorrect as P=MC indicates the firm is operating at allocative efficiency.
- D is incorrect for similar reasons given in A and C: the firm cannot be allocatively efficient if it is operating at a loss.