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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
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Market Diagram:
- Draw the supply and demand curves intersecting at the market equilibrium price, labeled as P<sub>e</sub> and quantity as Q<sub>e</sub>.
- Label the axes: Price on the vertical axis and Quantity on the horizontal axis.
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Firm Diagram:
- Draw a horizontal demand curve representing the market price (P<sub>e</sub>) faced by the firm.
- Include the Average Total Cost (ATC) curve, intersecting with the Marginal Cost (MC) curve at the profit-maximizing output level (Q<sub>f</sub>).
- Indicate normal profit at the output level where price equals ATC, reflecting zero economic profit in the long run.
Step 2
Which one of the following will exist in the short run if Chiara makes a loss?
Answer
The only correct answer is B: Allocative efficiency and productive inefficiency.
- A is incorrect because the firm is not operating at its minimum point on the AC curve.
- C is incorrect because P=MC, so the firm is allocatively efficient.
- D is incorrect based on the reasons given in A and C.