##### Assignment Instructions

1. Stateme nt of the Case Study
Teena is an art teacher but a year ago, she decided to take a year’s leave without pay to start a new business. She became the owner of a coffee shop in Al Barsha. She is selling coffee and sandwiches. She has leased two coffee machines at a cost of AED 1600 per month. The monthly rent for the café is AED 5000. Her salary as a teacher was AED 8000 per month. Teena hired two university students to help her, paying each student a monthly salary of AED 3000. Her monthly ex- penditure on coffee beans and other ingredients is AED 4000 and AED1000 on other expenditures (electricity, cleaning, etc.).
Teena faces the following demand curves for coffee and sandwiches.
Demand curve for coffee per week Qd = 200 – 2 x P
Demand curve for sandwiches perweek Qd = 400 – 12 x P
Teena has no knowledge of elementary microeconomics. She does not know how to calculate the elasticity of demand. She is currently charging a price of AED 20.00 per unit for both coffee and sandwiches, and is thinking about increasing the price of both to AED 25.00 per unit.
A friend of Teena’s was an undergraduate business student who told her that for her business to be worthwhile she should be making at least normal profit. Teena was curious about the profit she made last month and consulted an accountant and an economist. She provided all the above- mentioned information to the accountant and the economist. To her surprise, they come up with different values for the total profit before tax. This was very disturbing and confusing for Teena and she decided to consult an ECON 802 student to organize her thinking.
The demand equations are for weekly demand of coffee and sandwiches. The price that is being charged is AED 20 per cup of coffee and AED 20 per sandwich. The monthly economic profit and accounting profit should be calculated. To calculate the monthly revenue, multiply the quantity estimated by the demand equations by 4.

Complete the table below
Table 1
What is the dirham value of the monthly Economic profit and Accounting profit in this case study? (Fill in the blanks in Table 2). (Computations to arrive at the required result must be shown in the Appendix) Why are the two values different? (For the revenue, multiply the weekly quantity x 4 to get the monthly quantity).

Total Revenue
Coffee AED 20
Sandwiches AED 20

Table 2
Explain to Teena the meaning of “normal profit”. Does she need to exit the mar- ket if she is earning a normal profit?
Concept
Accounting Profit
Economic Profit
Calculate the elasticity of demand for both coffee and sandwiches when the price changes from AED20 to AED25. Fill in the blanks of Table 2. Calculations must be in the Appendix.
Table 3
Price Change Value of Price Elasticity of Demand

Price change of coffee fromAED20 to AED25

Price change of sandwiches fromAED20 to AED25

Explain the concept of price elasticity of demand to Teena and advise her about her pricing strategy for both coffee and sandwiches. Do you think it is a good idea for her to increase the price of both items from AED 20 to AED 25? Justify your an- swer.
Given the information provided describe the type of market Teena’s coffee shop is operating in. Make sure you explain the features and the behaviour of firms in this type of market.

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