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4. The market of cups of coffee on campus is competitive in thesense that individual firms cannot influence the market price. a) Zhichao and Miltran are considering opening a coffee shop. The market price of a cup of coffee is £2. They are not sure if they should open the business. They showed you various cost curves they have calculated and ask for advice. Explain how you would use the cost curves to determine whether the business would be profitable. b) A year later the price of coffee falls to £1.50 and it is not expected to change again. The coffee shop Z&M Expresso is not profitable. Zhichao suggests they should shutdown straight away whereas Miltran thinks they should wait until the end of the year before shutting down. They ask for your advice again. Explain under what conditions Zhichao would be right and under what conditions Miltran would be right.

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