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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 2
Which one of the following will exist in the short run if Chiara makes a loss?
Answer
The correct answer is B: Allocative efficiency and productive inefficiency.
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Allocative Efficiency:
- In the short run, even if Chiara is making a loss, the market can still achieve allocative efficiency which occurs when the price (P) equals the marginal cost (MC) of production.
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Productive Inefficiency:
- This condition arises when firms do not produce at the minimum point of their average cost (AC) curve. Thus, while Chiara may be covering some of her costs, she is not producing at the lowest possible cost, which indicates productive inefficiency.