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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 a standard supply and demand graph.
- Label the y-axis as "Price" and the x-axis as "Quantity."
- Draw the downward sloping demand curve (D) and the upward sloping supply curve (S).
- Identify the equilibrium price (P_e) where the two curves intersect.
- Label the equilibrium quantity (Q_e).
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Firm Diagram:
- Draw a typical firm diagram with the y-axis labeled as "Price/Cost" and the x-axis as "Quantity."
- Draw the Marginal Cost (MC) curve, the Average Total Cost (ATC) curve, and the Demand/Price curve (D=MR).
- Ensure that the MC curve intersects the D=MR curve at the profit-maximizing output level.
- Shade the area identifying normal profit, where price equals average total cost (P = ATC).
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.
- Explanation: In the short run, Chiara may not be operating at the minimum point of her Average Cost (AC) curve, leading to productive inefficiency. However, if price equals Marginal Cost (P=MC), allocative efficiency can still be achieved as resources are allocated where they are most valued.