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Emily owns and operates a nail ink salon - Edexcel - A-Level Economics A - Question 4 - 2018 - Paper 1
Question 4
Emily owns and operates a nail ink salon. The diagram shows the cost and revenue curves for treatments at her nail ink salon. Initially, Emily sets her price to maxi... show full transcript
Worked Solution & Example Answer:Emily owns and operates a nail ink salon - Edexcel - A-Level Economics A - Question 4 - 2018 - Paper 1
Step 1
Calculate the change in total supernormal profit if Emily changes her objective from profit maximisation to revenue maximisation.
Answer
To determine the change in total supernormal profit, we first need to identify the profit maximisation and revenue maximisation positions using the provided curves.
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Profit Maximisation Position:
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The profit maximisation occurs where Marginal Cost (MC) equals Marginal Revenue (MR). From the diagram, this occurs at an output level of 25 treatments where Price (AR) is £17.
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Total Revenue (TR) at profit maximisation:
TR = Price × Quantity = £17 × 25 = £425
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Total Costs (TC) at profit maximisation:
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From the diagram, Average Cost (AC) at output of 25 treatments is £8.
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TC = AC × Quantity = £8 × 25 = £200
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Total Profit (TP) at profit maximisation:
TP = TR - TC = £425 - £200 = £225
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Revenue Maximisation Position:
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The revenue maximisation occurs where MR = 0, which is identified at 36 treatments where the price is £12.
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Total Revenue (TR) at revenue maximisation:
TR = Price × Quantity = £12 × 36 = £432
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Total Costs (TC) at revenue maximisation:
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AC at output of 36 treatments is £9.
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TC = AC × Quantity = £9 × 36 = £324
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Total Profit (TP) at revenue maximisation:
TP = TR - TC = £432 - £324 = £108
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Change in Total Supernormal Profit:
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The change in profit when switching from profit maximisation to revenue maximisation:
Change in Profit = TP (Revenue Max) - TP (Profit Max) = £108 - £225 = -£117
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Thus, if Emily changes her objective from profit maximisation to revenue maximisation, total supernormal profit will decrease by £117.
Step 2
Emily now decides to change her objective from revenue maximisation to sales maximisation. This change will lead to:
Answer
The only correct answer is B.
- Explanation: Sales maximisation occurs when Average Cost (AC) equals Average Revenue (AR) and this generally happens at an output higher than revenue maximisation. Therefore, in order to achieve sales maximisation, the price of treatments will decrease to attract more customers, hence the correct option is B.
- A is incorrect because sales maximisation does not necessarily lead to a decrease in customer numbers; rather it aims to maximise the number of customers.
- C is incorrect since it does not imply an increase in productive efficiency.
- D is also incorrect as abnormal profit is removed when only normal profit is made at this output.