2. Blake’s Donut Shop has sold only one product—donuts—but is considering adding coffee as well. Blake’s contractor estimates that it will cost $20,000 of Blake’s savings, which were earning 3% annually, to convert some of the counter and storage space to accommodate coffee sales. Selling coffee will also incur an average annual cost of $3,000 to maintain equipment. Additionally, the variable cost of providing a cup of coffee is $0.25, and the price charged will be $1.00. Blake believes he will be able to sell 30,000 cups of coffee a year.
o Should Blake add a coffee service? If so, how long will it take Blake to recoup his initial costs of entry?
o After one year, Blake has to lower the price of his coffee to $0.75 a cup in response to competition to continue selling 30,000 cups of coffee a year. If he keeps the price of his coffee at $1.00, he will only sell 25,000 cups. What does this situation mean about the price elasticity for coffee in Blake’s market, and what would you advise Blake to do? Keeping in mind that Blake is not an economist, explain to him his options and advise which option is best. Use language that is professional yet accessible.
o How does the concept of cognitive bias influence the economic decisions presented in the scenarios?
Attachment:- 613631_1_Assignment-question.docx