Unit 8-Production, Cost and Competition (Part 2) The market for coffee near Sarb

Question

Unit 8-Production, Cost and Competition (Part 2) The market for coffee near Sarbucks stores has been stable for a long time, so that each store has optimized its fixed and variable costs given the demand for coffee at the store (i.e. each store is in long run equilibrium) and has specialized so that the stores only sell coffee. All Sarbucks stores are price takers. A firm in perfect competition is a price taker because there are no good substitutes for its good. b. a. they are profit maximizers. it is very large. d. c. many other firms produce identical products However, recent research indicates that coffee consumption may be harmful to health. How should a finding that coffee consumption harms health affect the demand for coffee? What is the effect on complementary goods such as pastry? Substitutes like tea? What is the effect of the study on Sarbucks in the short run? How do variable and fixed costs change? What happens to Sarbucks' competitors? Under what condition would a perfectly competitive firm who is incurring an economic loss temporarily stay in business? a. b. c. d. if the total revenue is positive if the total revenue exceeds the variable cost if the total revenue exceeds the fixed cost if the total revenue is increasing What is the effect of the study on Sarbucks in the long run? When firms in a perfectly competitive market are making earning an economic profit, in the long run, a. b. c. d. firms will exit the market. firms will continue to earn a profit. average cost will shift downward. firms will enter the market.

Explanation / Answer

1. Correct option: (d) many other firms produce identical products

Reason: In case of perfectly competitive market, there are a large number of buyers and sellers selling identical products, which increases market competition and firms have to sell the goods at the same price otherwise it would incur loses.

2. Demand for coffee will fall

Similarly, demand for complementary good will fall as coffee consumption will fall

Demand for substitute good like tea will increase as people will substitute coffee for tea

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