Question 21N.3.HL.TZ0.1
| Date | November 2021 | Marks available | [Maximum mark: 25] | Reference code | 21N.3.HL.TZ0.1 |
| Level | HL | Paper | 3 | Time zone | TZ0 |
| Command term | Calculate, Determine, Explain, Label, List, State | Question number | 1 | Adapted from | N/A |
Firm A is producing at a level of output Q1, which is equal to 1500 units per month, and its costs and revenues are shown in Table 1.
Table 1
Using the data in Table 1, state the reason why Firm A is operating in a perfectly competitive market.
[1]
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].
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.
On the diagram, label Firm A’s cost curves. The use of figures provided in Table 1 is not required
[3]
ATC accurately labelled [1]
AVC accurately labelled [1]
MC accurately labelled [1]
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.
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.
[2]
Generally well-answered. Some candidates referred to minimum AVC rather than ATC.
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.
[2]
Lower-achieving responses confused productive efficiency with allocative efficiency.
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.
[2]
Very well-answered.
Using Table 1, calculate the monthly profit or loss Firm A is making at the current level of output, Q1.
[2]
TR = 30 × 1500 = 45 000
TC = 32 × 1500 = 48 000
Any valid working is sufficient for [1].
= 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:
= (AR − ATC)Q = (30 − 32)1500 =− $3000
A small number of candidates calculated profit/loss per unit only rather than monthly profit/loss.
Using Table 1, calculate the total fixed costs incurred by Firm A at the current level of output, Q1.
[2]
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].
A small number of candidates calculated fixed cost per unit.
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.
[1]
= 3
An answer of $3.00 or 3 is sufficient for [1].
OFR applies.
Although this part was mostly answered well, many candidates made the careless error of dividing by 1500 units rather than 2000.
List two assumptions of the perfect competition model.
[2]
Most candidates achieved full marks. The main weakness was to list consequences of the assumptions, such as “making normal profit”.
Explain why a loss-making perfectly competitive firm will shut down in the long run but may not shut down in the short run.
[4]
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.
Explain why in the long run economic losses cannot persist in a perfectly competitive market.
[4]
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.