Using information from Figure 1, calculate Firm A’s total fixed costs.

The market price of almonds is $11 per kilogram. Using Figure 1, identify the quantity of almonds Firm A must produce in order to maximize profits.

Calculate the economic profit/loss when Firm A is producing at the output level identified in part (b)(i).

Based on the information in Figure 2, state whether the firms in this market are making normal profits, economic profits or economic losses.

On Figure 2, draw and label appropriate additional curves to show how a perfectly competitive market will move from short-run equilibrium to long-run equilibrium.

Using your answer to part (c)(ii), explain how the market adjustment takes place.

State two assumed characteristics of a monopoly.

Explain two reasons why a monopoly may be considered desirable for an economy.

Using Figure 3, calculate the economic profit when Firm B is maximizing its profits.

Using Figure 3, calculate the total revenue when Firm B is maximizing its revenue.

A shampoo firm is earning economic profits. Outline, with a reason, what will happen to its demand curve in the long run.

Sketch and label a diagram to illustrate the long-run equilibrium for a firm in monopolistic competition.

20 (29 − 10)

Any valid working (from another output level e.g. 30 (24.67 − 12)) is sufficient for [1].

= $380

Allow +/− $10 i.e. from $370 to $390.

NB responses that lie outside the +/− $10 tolerance but indicate that, at a given quantity, the AVC and ATC are approximately accurate (eg 45 (31 − 23) = $360) may be fully rewarded.

An answer of $380 or 380 without workings is sufficient for [1].

For full marks to be awarded, the response must provide valid working and include correct units. However, superfluous units (e.g. $380 per kg) may be ignored.

21 kg OR 21 is sufficient for [1].

21 (11− 28)

Any valid working is sufficient for [1].

= − $357 OR (economic) losses = $357

OFR applies if incorrect quantity is given for (b)(i).

An answer of a loss of $357 or −357 without workings is sufficient for [1].

For full marks to be awarded, the response must provide valid working and include correct units. However, superfluous units may be ignored.

Economic losses OR losses

is sufficient for [1].

[1] for one accurate, labelled diagram OR two diagrams without labels.
[2] for two accurate, labelled diagrams.

D₁ or AR₁ or MR₁ is sufficient for firm’s model. P₁ is not required for firm’s model. Titles are not required for the diagrams.

The firm’s new Q need not be specified on the diagram.

Award [1] for each valid characteristic:

• single or dominant firm in the market OR market power/price-setting power
• no close substitutes
• significant barriers to entry.

Any other valid characteristic.

20 (20 − 15)

Any valid working is sufficient for [1].

= $100

An answer of $100 or 100 without workings is sufficient for [1].

For full marks to be awarded, the response must provide valid working and include correct units.

NB Answers that include “per gram” may be accepted.

30 × 15

Any valid working is sufficient for [1].

= $450

An answer of $450 or 450 without workings is sufficient for [1].

For full marks to be awarded, the response must provide valid working and include correct units.

NB Answers that include “per gram” may be accepted.

[1] for D tangential to ATC (AC)
[1] which is vertically above intersection of MR and MC
[1] for correctly indicating Po and Qo, where MR = MC and D is tangential to ATC

A response with missing or incorrect labels or without MC intersecting minimum ATC may be awarded a maximum of [2].

Vertical axis may be labelled P or Price or Costs or Revenue. Horizontal axis may be labelled Quantity or Q or Output.

NB Provided that the price and quantity have been labelled (eg Po, Qo) then it is not necessary to label the axes.

Candidates were generally able to recognize that Q(ATC−AVC)= FC although a significant minority simply subtracted AVC from ATC. Those who selected a quantity of 20kg for the calculation were able to produce an answer of $380. However, candidates who selected an alternative quantity found some difficulty in reading precise figures from the graph. Candidates who performed a calculation based on a reasonable reading from the graph were awarded appropriately.  

Most candidates recognized the profit-maximizing level of output at 21kg.

Stronger candidates were able to perform the calculation using an accurate reading from the graph. However, there was some tendency to mix the price with AVC or to revert to the quantity which had been selected for part (a). 

Well answered. candidates recognized that if ATC>P then economic losses are made. 

The majority of candidates were able to sketch a new, correctly positioned supply curve above/to the left of the original while some sketched a much smaller decrease in supply than that required. While most candidates sketched and labelled the firm's new demand curve correctly, a surprising number did not draw a new curve for the firm. Some students were not able to distinguish between a short-run shutdown (when firms continue to make losses but temporarily halt output and stop paying their VC), and a long-run exit of firms from a market, which will raise the price until normal profits are being earned at minimum ATC. 

Candidates who chose question one generally had a good understanding of the model and were able to respond accurately. Weaker answers omitted a reference to the price increase.

Generally well-answered by the majority. Weaker responses stated that "abnormal profit" was a characteristic rather than a consequence of the market characteristics.

Most candidates identified "economies of scale" and "abnormal profit allows for more R&D" as relevant points. Weaker students neglected to explain why these may be desirable ie how society (rather than the firm itself) may benefit from these factors. Candidates who described natural monopoly tended to neglect to explain how/why it might be desirable.

Well-answered. The majority of candidates identified the profit-maximizing level of output and calculated profit correctly.

Stronger candidates recognised that revenue is maximized where MR= 0 and used this knowledge to calculate total revenue correctly. However, a significant minority were unable to apply this theory correctly.

Most candidates recognized that the existence of economic profits would attract new firms into the industry and consequently shift the shampoo firm's demand curve to the left/make the demand curve more elastic. However, a minority argued that increased competition might reduce prices and increase demand. There was some confusion between the firm and the market/industry.

Well-prepared candidates were able to sketch an accurate diagram and earn full marks. However, a significant majority were unable to do so. The important feature that distinguishes monopolistic competition from monopoly in the long run is that AR (the demand curve) is tangential to the ATC curve, but not at minimum ATC, which would be the case in perfect competition. (Students should note that a monopoly may also be making normal profits when it so happens that its profit maximizing quantity occurs where AR intersects ATC.)