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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 find the change in total supernormal profit, we must first identify the profit maximisation and revenue maximisation points from the diagram:
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Profit Maximisation: This occurs where Marginal Cost (MC) equals Marginal Revenue (MR). According to the diagram, this happens at an output level of 25 treatments per day, where the price is £17. The Average Cost (AC) at this output level is £9, so:
- Total Revenue at profit maximisation = Price × Quantity = £17 × 25 = £425
- Total Cost = AC × Quantity = £9 × 25 = £225
- Total Profit = Total Revenue - Total Cost = £425 - £225 = £200.
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Revenue Maximisation: This occurs where MR = 0, which according to the diagram, is at an output level of 36 treatments per day and price of £12. At this point, calculate:
- Total Revenue = Price × Quantity = £12 × 36 = £432
- Total Cost at this quantity (AC at £3) = £3 × 36 = £108
- Total Profit = Total Revenue - Total Cost = £432 - £108 = £324.
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Now calculate the change in supernormal profit:
- Change in Profit = Profit at Revenue Maximisation - Profit at Profit Maximisation = £324 - £200 = £124.
Thus, the change in total supernormal profit is an increase of £124.
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. A decrease in the price of treatments.
- A is incorrect, because sales maximisation occurs when AC equals AR, which is at an output higher than revenue maximisation.
- C is incorrect because AC is higher at the sales maximisation output than at revenue maximisation levels.
- D is incorrect, as abnormal profit is removed and only normal profit is now made.