However a reduction in the Tea supply (a substitute good) causes demand to go up for coffee beans and price
Sam owns a business importing coffee beans from South America once imported; Sam quickly sells the Show more Sam owns a business importing coffee beans from South America once imported; Sam quickly sells the beans to a distributer. The coffee bean market is perfectly competitive and Sam is a price taker. Sam faces a business situation where the minimum of the average total cost (ATC) is $50 and occurs at Q=100. The minimum of the average variable cost (AVC) is $30 and occurs where Q=55. The minimum of Marginal cost (MC) is $10 and occurs where Q=20 To start Sam is in short run equilibrium. However a reduction in the Tea supply (a substitute good) causes demand to go up for coffee beans and price to rise by $10. At this new price marginal revenue equals marginal cost at Q=120. Using graphs: plot Sams situation before and after the demand shift (Plot the situation before and after the change in the price of tea on the same graphs). After the demand increase is Sam making a profit or loss? Explain you answer. If Sams situation changed and price dropped below $50 but above $30 what you recommend he do and why? Show less
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