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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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Lemon Market Diagram:
- Start with the horizontal axis representing quantity and the vertical axis representing price.
- Draw the downward sloping demand curve and the upward sloping supply curve, intersecting at the equilibrium price ().
- Label the market equilibrium price and quantity.
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Typical Firm Diagram:
- Again, on a horizontal axis for quantity and vertical for price.
- Draw the Marginal Cost (MC) curve, which intersects with the Average Total Cost (ATC) curve at its minimum.
- Include the Demand Curve (D = MR) that is horizontal at the market price, indicating perfect competition.
- The profit maximization output occurs where , and identify the normal profit area, represented where .
Step 2
Which one of the following will exist in the short run if Chiara makes a loss?
Answer
In the short run, if Chiara makes a loss, the correct option is B - Allocative efficiency and productive inefficiency. This is because:
- Allocative efficiency occurs when the price equals marginal cost (), which can still happen even at a loss.
- Productive inefficiency occurs if the firm is not producing at the minimum point of average cost (AC), which is likely if Chiara is operating at a loss.