N18/3/ECONO/HPSIENG/TZO/XX Answer two questions. E: he : t be written within the answer boxes provided ach question is worth [25 marks}. Answers must 1. Fim A produces cartons of coffee. Figure 1 ilustrates the firm's total cost (TC) and variable cost (VC) at different output levels per month Figure 1 2000 1800 Te 1600 ve g 3 B6 1000 8 Costs, revenue ($ per carton) 8 & 8 200 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 Quantity of cartons of coffee per month (a) () Calculate Firm A's average fixed costs when it is producing 125 cartons of coffee per month. rr} (This question continues on the following page) i tnN18/3/ECONO/HP3/ENG/TZOIXX costint continued) i) Calculate Firm As average variable costs wh qi) Si cates pat rion 1en it is producing 125 cartons (This question continues on the following page)B = a4 N18/ECONOIHP/ENGITZO/XX (Question 1 continued) Figure 2 illustrates the avera snd marginal cost (MC) 19e total cost (ATC), average variable cost (AVC) and margi at different output levels for Firm B, which produces cans of tea Figure 2 Costs, revenue ($ per can) 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 Quantity of cans of tea per month (>) () Using Figure 2, calculate the average fixed costs when 80 cans per month are produced. 11) (i) Using Figure 2, calculate the total costs when 55 cans per month are produced. [2] ues on the following page) tNN18/3/ECONO/MP3/ENG/TZOIXX {question 1 continued) (ii) Explain why in the short run, as out itput increas decrease and then increase eae eecoae ueICaRy ‘The price of tea in the perfectly competitive tea market is presently $21 per can (c) (Using this information, draw and label the average revenue curve on Figure 2. [1] (ii) Using Figure 2, identify the quantity of cans per month Firm B must produce in order to maximize profits. tm (ii) Caloulate the economic profit when Firm B is producing at the output level identified in part (ci, 2] (This question continues on the following page) Turn overN18/9/E CONOMHPS/ENG/TZOXX (Question 1 continued) (4) Someti Sometimes a frm continues to produce in he short run, even when itis meting mic loss, Explain why the firm might choose to do this. a 5 (©) Outline why a perfectly compettve frm is a “price taker”. a (f)_ Firm B and all the other firms in the tea market begin to sel 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. R] (This question continues on the following page)ie ge N18/3/ECONOIHPSIENGITZOIXX Saat continued) (a Firm B conducted a market survey and found out that the price elasticity of demand @ forits beat is tee eo ences ouicnen| whereas itis 1.2 nana customers invural aid "This information could help Firm B to rais venue, by trying to separate the two markets, provi A toverag Eaplain ts statement , Provided that certain conditions are io}NB CONOHPSIENGITZOXXM Notes for examiners: 4. Whenever rele, ‘vant, car calculation, but then uses wer Mark in but then 'S must be awar idate makes an error Par tenn cong hear ig rier ast Put OFR on the script where pa ae erated, ‘This is the “own-figure rule” and you shoul re rewarding this 2. Alternative approae hes may By terms. I thiste be taken in responses tothe [4] questions that use AO2 comma nen ME tee eater eee node 1 @) WO Catcuta cafes par NS average fi cartons: of cottes por as erage fixed costs when itis producing 125 500 125 ‘entiation of FC at $500 or any valid working is suiient fr [1] $4 ‘An answer of $4 or 4 (without working) is sufficient for [1]. (@Caleutte Fim a's avera iim A's average variable costs when itis producing 125 cartons of coffee per month. 5 Q (2) 1500 125 Identifcation of VC at $1 500 or any valid working is sufficient for [1]. =812 An answer of $12 oF 12 (without working) is sufficient for [1]. (b) ())___ Using Figure 2, calcuiate the average fixed costs when 80 cans per month are produced. i ‘An answer of $5 is sufficient for [1].month (i) Using Figure 2, calculate the total costs when 58 cans Per are produced. 30 «55 1} Identiication of ATC al $30 or any valid working is sufficient for [1 = $1650 ‘An answer of $1650 or 1650 (without working) is sufficient for [1 f NB Ifthe candidate identifies ATC as $29 or $31, (with a final answer of ‘$1595 or $1705) this should be fully rewarded. i increases, marginal costs typically (i) Explain why inthe short run, as outpu a decrease and then increase. Level Mars | The work does nat meet a standard described by the descriptors below. 5 1 _| The writen response Ts Timited Ss Fora limited explanation that marginal product initially fends to increase but then because ofa fixed input (fector), diminishing returns cause MP to fal oR MP falls because of a fixed input, which increases the additional Costs of one more unit, and 80 MC increases Allow [1] mark only if ‘productivity’ used instead of MP or if fixed input not mentioned. ‘An algebraic response (see below) without any reference to The Law of Diminishing Marginal Returns may be awarded a maximum of [2] marks. 2_| The wniten response is accurate. 3h For explaining that marginal product initially tends to increase, due to specialization, but then because of a fixed input (factor) that has to be shared, diminishing returns cause MP to fall. AND EITHER 8 MP falls, the additional costs of one more unit of output will begin to increase and so MC increases. OR Ave (wh). (at 1 mc = AVC _ Aw), (ab aa AQ “(% “(i) 80, if MP increases, then MC will decrease and, wher decreases (a8 aresul ofthe LODMRs), then MC wil nerease,© w Nt srvecoNOMPa/ENG/TZOr00M enue curve on Figure 2 ro Using this information, draw and label the average © (il) (ii) A correctly labelled AR (or P/MR/D) line is sufficient for [1]. Using Figure 2, enti the quantty of cans per month Firm B must produce cl in order to maximize profits Where marginal revenue equals marginal cost. An answer of 105 is sufficient for [1]. Ifthe candidate identifies the quantity as 104 or 106 this should be fully rewarded. OFR may apply. Calculate the economic profit when Firm B is producing at the output level identified in part (ci) fa 405 (21-23) ‘Any valid working is sufficient for [1]. $210 or a loss of $210 ‘An answer of -$240 or a loss of $210 (without working) is sufficient for [4]. FR may apply — eg -$208 if 104 cans identified in (c)(i) OR -$212 if 106 cans identified in (c)(i)@) fe) cu oduce in the short run, even when it is making Sometimes a firm continues 10 P' a Sarees Ss, Explain why the firm might choese f0 40 nl Marks Level | ear aoes vat nesta Standard desorbed by the descriptors 0 below. = : 7_[ There is Imited understanding. Fora response that ine price s above the shut-down PUES (minimum AVC) OR the firm is covering its varia 5 - 2_| There is clear understanding. Fee sponse than fhe shor run, the fm should continue produce provided price covers (average) variable cols, £0 fs making a contribution to fixed costs OR the firm's joss less than its fixed costs, so its losses would be greater If! down Outline why a perfectly competitive firm is a “price taker” Level Marks 0. | The work doos not meet a standard desenbed by the descnptors | 0 below. 7_| There is imited understanding. i For a response that it does not have market power and $0 must accept the market price. 2_| There is clear understanding. 2 ifthe firm raises the price both its quantity sold and revenue will drop to zero (there is also no benefit from lowering its price, since it can sell any amount at the market price) Firm B a 's and many differentiate their product with organic tea or fruit flavour ind all the other firms in the tea market begin to sell their tea in distinctive rs, package: Explain how the demand curve faced by Firm B will change as a result Level Marks: (0 _| The work does not meet a standard described by the descriptors | 0 below. 1_| There is limited understanding. 7 For a response that the demand curve will now slope down. 2_| There is clear understanding. 2 For a response that the demand curve will slope down because the firm now has the market/monopoly power (or the ability to be a price maker) OR that the demand curve will slope down because itis now a monopolistic competitor OR the firm's ‘demand curve is no longer perfectly elastic because it now has the market power to change its price. N1BG/ECONOMHPSIENGITZO/xx/94 q Q (2)KIN N18//ECONO/HP3/ENGITZO/ At iene to rete 3 marge, Survey and found out that the price {among customers is brand of tea “0.8 among urban fustomers, whereas itis 1.2 among customers ma 288. The sate rector said “This information could hel tain conditions are 4 ec 8 Ying to sepa Name {Wo markets, provided that cer Satisfieg" Explain this Statement. : Firm B cour: a * Bie? Sctiminat in tug Separate markets (charge diferent prices Giferenuseparne Markets) charge anor T Price to urban 1en deman ral) da mers (ora lower price to {or when elastic deman : kis meoSHe 8 higher price yids more revonu earareene Finer rice yields pret revenue) ity for resale (or Firm * Fit 8 needs tg ScP2rate the two markets so no ‘opportunity have some me OPOlyiprice-setting Power), Marks oO criptors The work does nor ‘meet a standard described by the des below. There is limite 12 d understanding, Award [1] for one ofthe points above: Award alee wo of the points above. 34 lear understanding for