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theory of the firm paper 1


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i did a practice theory of the firm paper 1 today, nailed the 15 marker but messed up on the 10 marker. if the question asked about why loss making firms in perfect competition will exit in the long run, how many marks could i potentially lose if i drew the wrong (?) diagram (i drew a firm breaking even in the long run and talked about how inefficient firms will be driven out by the more efficient ones etc.)?

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  • 2 weeks later...

Given you defined the key economic terms included in the question and explained your diagram (drawing the breaking-even perfectly competitive firm is not a mistake as that is the long-run outcome) and gave some real-workd examples, you should not lose a lot of points even if the explanation is not the best. Btw, loss-making firms in the short-run means that in the long-run firms will start leaving the market (it is not incorrect to say that "firms will be driven out") as it is free to exit. As a result, the market supply falls, raising the market price and as all firms are price-takers, each individual firm will finally sell at the (now higher) market price (where they break-even).

So to be honest, it doesn't seam like you really messed it up, but without having your actual answer I cannot tell for sure how many marks you've lost. Keep us updated when it comes out. I'm also happy to look at it once its graded.

EconDaddy
IB Economics teacher, examiner and tutor
www.econdaddy.com

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