| Date | November 2018 | Marks available | 1 | Reference code | 18N.3.HL.TZ0.1 |
| Level | Higher level | Paper | Paper 3 | Time zone | Time zone 0 |
| Command term | Label and Draw | Question number | 1 | Adapted from | N/A |
Question
Firm A produces cartons of coffee. Figure 1 illustrates the firm’s total cost (TC) and variable cost (VC) at different output levels per month.
Figure 1
Figure 2 illustrates the average total cost (ATC), average variable cost (AVC) and marginal cost (MC) at different output levels for Firm B, which produces cans of tea.
The price of tea in the perfectly competitive tea market is presently $21 per can.
Calculate Firm A’s average fixed costs when it is producing 125 cartons of coffee per month.
Calculate Firm A’s average variable costs when it is producing 125 cartons of coffee per month.
Using Figure 2, calculate the average fixed costs when 80 cans per month are produced.
Using Figure 2, calculate the total costs when 55 cans per month are produced.
Explain why in the short run, as output increases, marginal costs typically decrease and then increase.
Using this information, draw and label the average revenue curve on Figure 2.
(ii) Using Figure 2, identify the quantity of cans per month Firm B must produce in order to maximize profits.
(iii) Calculate the economic profit when Firm B is producing at the output level identified in part (ii).
Sometimes a firm continues to produce in the short run, even when it is making an economic loss. Explain why the firm might choose to do this.
Outline why a perfectly competitive firm is a “price taker”.
Firm B and all the other firms in the tea market begin to sell their tea in distinctive packages and many differentiate their product with organic tea or fruit flavours. Explain how the demand curve faced by Firm B will change as a result.
Firm B conducted a market survey and found out that the price elasticity of demand for its brand of tea is 0.8 among urban customers, whereas it is 1.2 among customers in rural areas. The sales director said “This information could help Firm B to raise its revenue, by trying to separate the two markets, provided that certain conditions are satisfied”. Explain this statement.
Markscheme
Identification of FC at $500 or any valid working is sufficient for [1].
= $4
An answer of $4 or 4 (without working) is sufficient for [1].
Identification of VC at $1 500 or any valid working is sufficient for [1].
= $12
An answer of $12 or 12 (without working) is sufficient for [1].
(25 − 20)
= $5
An answer of $5 is sufficient for [1].
30 × 55
Identification of ATC at $30 or any valid working is sufficient for [1].
= $1650
An answer of $1650 or 1650 (without working) is sufficient for [1].
NB If the candidate identifies ATC as $29 or $31, (with a final answer of $1595 or $1705) this should be fully rewarded.
A correctly labelled AR (or P/MR/D) line is sufficient for [1].
(ii) Where marginal revenue equals marginal cost.
An answer of 105 is sufficient for [1].
If the candidate identifies the quantity as 104 or 106 this should be fully rewarded.
OFR may apply.
(iii) 105 (21 − 23)
Any valid working is sufficient for [1].
= −$210 or a loss of $210
An answer of −$210 or a loss of $210 (without working) is sufficient for [1].
OFR may apply — eg −$208 if 104 cans identified in (ii) OR −$212 if 106 cans identified in (ii).
Firm B could:
- price discriminate in two separate markets (charge different prices in different/separate markets)
- charge a higher price to urban customers (or a lower price to rural)
- when demand is inelastic a higher price yields more revenue (or when elastic demand a lower price yields more revenue)
- Firm B needs to separate the two markets so no opportunity for resale (or Firm B needs to have some monopoly/price-setting power).
