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1) How could we argue that this market is not competitive?
a. The individual coffee shops do not have the power to control price on many items that they sell, so they are not able to compete on price.
b. They usually purchase products from the same distributor: i.e., all coffee shops buy their Coke products from the same Coke distributor. Thus, individual coffee shops do not really compete with each other.
c. Most coffee shops have a relatively small geographic range; they do not attract consumers from very far away, and thus do not compete with the coffee shops across town.
d. Each coffee shop is so small relative to the size of the market that their actions do not affect the rest of the market, therefore they do not have to behave in a competitive way.
2) Could each coffee shop face a demand curve that is not perfectly elastic?
a. Yes; if they have some degree of market power (e.g., they can charge slightly higher prices since consumers will not stop at every coffee shop in town to find the cheapest latte), then they will not face perfectly elastic demand.
b. No; the conditions mentioned (many small sellers, price-takers, homogeneous products) guarantee that each of these industries will be perfectly competitive. Demand will always be perfectly elastic.
c. No; since customers aren’t willing to spend their morning visiting each coffee shop in a large city to find the best deal, then each firm’s demand curve will be perfectly elastic since consumers do not have full information.
d. Yes; if the individual firm demand curve is horizontal, then demand is not perfectly elastic. This will often be true for small sellers.
3) How profitable do you expect coffee shops to be in the long run?
a. Because of rising prices of coffee, each of these industries is expected to suffer long-run losses for the foreseeable future.
b. Even with a small amount of market power, it is still relatively easy to enter and exit these industries. Long-run profits will likely be driven down close to zero.
c. Coffee shops that only sell coffee would be expected to enjoy long-run positive profits since they can focus on only one product; coffee shops that sell a wide range of products would be expected to break even or take losses in the long run because they will have an unfocused strategy.
d. Since these firms retain considerable market power (ability to set price), then they are expected to enjoy long-run positive profitability for the foreseeable future.
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