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In 2015 JCB, the construction equipment manufacturer, experienced a 6% fall in revenue - Edexcel - A-Level Economics A - Question 4 - 2017 - Paper 1
Question 4
In 2015 JCB, the construction equipment manufacturer, experienced a 6% fall in revenue. This resulted from a reduction in sales of construction equipment to emerging... show full transcript
Worked Solution & Example Answer:In 2015 JCB, the construction equipment manufacturer, experienced a 6% fall in revenue - Edexcel - A-Level Economics A - Question 4 - 2017 - Paper 1
Step 1
Draw a cost and revenue diagram.
Answer
To illustrate the impact of a reduction in sales on JCB's profits, the following steps are essential:
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Original Equilibrium: Begin with an initial equilibrium point where marginal cost (MC) intersects marginal revenue (MR). This point represents the original output (Q1) and price (P1) before the reduction in sales.
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New Marginal Revenue Curve: Show a downward shift of the average revenue (AR) and marginal revenue (MR) curves due to the 6% fall in revenue. This reflects the decrease in demand and will lead to a new equilibrium.
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New Equilibrium: Mark the new intersection of the MC curve with the lowered MR curve, indicating the new output level (Qe) and corresponding price (Pe).
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Profit Areas: Highlight the original area of supernormal profit (SNP) and the new area of SNP after the reduction. The decrease in the area signifies a fall in profits.
Illustrating these changes clearly in the diagram will provide a comprehensive view of the impact on JCB's profits.
Step 2
In India JCB has a strong brand image and a 50% share of the market for construction equipment. This means the construction equipment market in India is likely to have a low level of:
Answer
B contestability
The market's characteristics suggest that JCB's significant market share and strong brand create barriers for potential competitors, hence illustrating a low level of contestability.