Question

Simon is the manager of Sunshine café who is responsible for taking the accounting records daily. He found that when the price of coffee was increased from $30 to $33, the daily sales of Cappuccino decreased from 115 cups to 92 cups; while the daily sales of Mocha decreased from 90 cups to 85 cups. Meanwhile, a supplier who providing raw materials to Sunshine café mentioned that the cost of sugar will be changed from $27/kg to $29/kg next month. For that sugar, suppose that it’s quantity demanded (QD) is represented by the equation, QD = 1388 – 35P; and it’s quantity supplied (QS) is represented by the equation, QS = P, where P is the unit price of each kg of sugar.


(a) Calculate the price-elasticity of demand of the two types of coffees by using mid-point method.
(b) From the results obtained in part (a), describe whether the demand for the two types of coffees are elastic or inelastic.
(c) Determine and elaborate whether the demand curve of the coffees shall be shifted to the left or right due to the increasing cost of sugar next month.
(d) Determine the equilibrium price and quantity of the sugar. Justify your answers by showing supporting equations and calculation steps clearly.
(e) As mentioned in the paragraph, determine whether there will be a surplus or shortage on sugar when the price to be set at $29/kg next month. Besides, will the price rise or fall so as to reach the equilibrium point?
(f) Identify and elaborate TWO main problems that happened in the society when monopolies exist in the markets.

Answer 1