Using the data in Table 1, state the reason why Firm A is operating in a perfectly competitive market.

On the diagram, label Firm A’s cost curves. The use of figures provided in Table 1 is not required

Using the figures in Table 1 or the diagram in part (b), determine whether Firm A is productively efficient. You must give a reason for your choice.

Using the figures in Table 1 or the diagram in part (b), determine whether Firm A is allocatively efficient. You must give a reason for your choice.

Using the figures in Table 1 or the diagram in part (b), determine whether Firm A is producing at the profit-maximizing (loss-minimizing) level of output. You must give a reason for your choice.

Using Table 1, calculate the monthly profit or loss Firm A is making at the current level of output, Q₁.

Using Table 1, calculate the total fixed costs incurred by Firm A at the current level of output, Q₁.

Using your answer to part (e), calculate the average fixed costs if Firm A produces 2000 units of output per month instead of Q₁ units.

List two assumptions of the perfect competition model.

Explain why a loss-making perfectly competitive firm will shut down in the long run but may not shut down in the short run.

Explain why in the long run economic losses cannot persist in a perfectly competitive market.

An answer which indicates that MR = P or AR = MR or that the demand curve faced by the firm is horizontal/perfectly elastic is sufficient for [1].

ATC accurately labelled [1]

AVC accurately labelled [1]

MC accurately labelled [1]

TR = 30 × 1500 = 45 000

TC = 32 × 1500 = 48 000

Any valid working is sufficient for [1].

$\mathrm{\pi }$ = 45 000 − 48 000

= −$3000

An answer of −$3000 or 3000 without any valid working is sufficient for [1].

NB alternative calculation, which should be fully rewarded:

$\mathrm{\pi }$ = (AR − ATC)Q = (30 − 32)1500 =− $3000

AFC = 32 − 28 = 4

Any valid working is sufficient for [1].

FC = AFC × Q = 4 × 1500

= $6000

An answer of $6000 or 6000 without any valid working is sufficient for [1].

$\frac{6000}{2000}$ = 3

An answer of $3.00 or 3 is sufficient for [1].

OFR applies.

Generally well-answered, although a few scripts suggested “P = AR” as a justification or that “the firm is making normal profit” — neither of which serve as justification.

The majority of candidates achieved full marks although some used AC rather than ATC — deemed to be lacking in the required precision when both AVC and ATC curves are present.

Generally well-answered. Some candidates referred to minimum AVC rather than ATC.

Lower-achieving responses confused productive efficiency with allocative efficiency.

Very well-answered.

A small number of candidates calculated profit/loss per unit only rather than monthly profit/loss.

A small number of candidates calculated fixed cost per unit.

Although this part was mostly answered well, many candidates made the careless error of dividing by 1500 units rather than 2000.

Most candidates achieved full marks. The main weakness was to list consequences of the assumptions, such as “making normal profit”.

Although there were some precise, accurate responses, many candidates struggled to articulate the key ideas. In explaining the short-term scenario, it was common to see scripts which suggested that fixed costs must be covered in the short term. Few candidates explained clearly that losses would be minimized in the short run by remaining open provided variable costs are covered. For the long run, candidates often stated that “variable costs have to be covered” without reference to the short/long run distinction or the idea that covering all costs will result in normal profit being made.

Responses were generally accurate although some candidates did not refer to a decrease in market supply (due to loss-making firms exiting the industry) but instead suggested that demand/market share for remaining firms increases.