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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 axes: Price (vertical) and Quantity (horizontal).
- Draw the downward-sloping demand curve (D) and the upward-sloping supply curve (S).
- Identify the equilibrium price (P*) where D intersects S.
- Mark the equilibrium quantity (Q*) below P*.
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Firm Diagram:
- Draw the axes: Price (vertical) and Quantity (horizontal).
- Draw a horizontal line at the market price (P*), which represents the Price = Demand = MR for the firm. This line indicates a perfectly elastic demand facing individual firms.
- Draw the average total cost curve (ATC), which should be tangent to the MR curve at the profit-maximizing output (Qf) level.
- The marginal cost curve (MC) should intersect the MR curve at the same quantity (Qf), confirming profit maximization.
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.
- In the short run, Chiara's firm may not be operating at its minimum point on the average cost (AC) curve, leading to productive inefficiency.
- However, since price (P) is equal to marginal cost (MC) at equilibrium, allocative efficiency is maintained because resources are allocated based on consumer preferences.