Question

Katherine owns and operates one of the many independent coffee shops in Boston, which has everything from espresso to pour overs, to lattes and cold brew, as well as a wide selection of baked goods. However, Katherine uses a unique selection of single origin, organically grown, hand-roasted coffee beans. Katherine can run her coffee shop as a monopoly, as she is the only one in Boston with her unique selection of beans. The following figure depicts the demand curve that she faces and the costs that she incurs. 

Using the area tool in the graph below, draw the area that represents the profit or loss. 

To refer to the graphing tutorial for this question type, please click here. 

of the following statements, which one best describes what we can expect to happen to this market in the long run? 

Choose one: 

A. One or more coffee shops in Boston open and compete with Katherine, which leads to a decrease in demand for Katherine's coffee. Profits decline until Katherine exits the industry, 

B. One or more coffee shops in Boston close, which leads to an increase in demand for Katherine's coffee. Profits decline until Katherine exits the industry. 

C. One or more coffee shops in Boston close, which leads to an increase in demand for Katherine's coffee. Profits remain positive in the long run. 

D. One or more coffee shops in Boston open and compete with Katherine, which leads to a decrease in demand for Katherine's coffee. Profits decline until Katherine is earning zero profit.

Answer 1

The answer:B.  One or more coffee shops in Boston open and compete with Katherine, which leads to a decrease in demand for Katherine’s coffee. Profits decline until Katherine is earning zero profit.

Answer 2

Ans. Option d

In short run, the equilibrium where the profit is maximized is where marginal revenue equals marginal cost. The equilibrium is represented in the figure and the shaded area represents the profits earned.

So, seeing this profit, in long run, many more coffee shops will be attracted to this industry. This will increase Katherine's competition and demand for her coffee will decrease. This will decrease the price of coffee in the market. This entry of more shops will happen till the price does not become equal to the average total cost. This will lead to zero economic profits to Katherine in long run.

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