Question

You run a successful coffee shop in Houston.   Like many other businesses in your industry you sell pastries along with your coffee. However, due to successful marketing campaigns, the market is convinced that your cupcakes are the best in town. As a result, you are able to charge a higher price for these cupcakes without losing your entire market share. The profit maximizing quantity of cupcakes for you is 60 per day at a price of $2.75 each.

Assuming the total cost of producing 60 cupcakes is $125, how much profit is your shop making off them? Will this profit attract new entry?

In the long run, what will happen to your firm’s profits?

Answer 1

As the price of each cupcake is $2.75 and the shop is selling 60 of them every day. Total Revenue form this sale is $165 (2.75 x 60).

The total cost of producing those cupcakes = $125.

Profit = Total revenue - Total cost.

= $40.

Yes, As the profit is super normal it will attract new entrants in the business. More and more firms will get attracted by the profit and these new entrants will come as long as there is no more supernormal profit left and all the firm are just breaking even.

b) In the long run, the cafe will only be breaking even and no supernormal profit. Breaking even is a point where the cost is equal to the revenue.