Fair Trade Coffee

Use the following articles and your knowledge of market structures and costs of production to answer the following questions.
Fair Trade Coffee
About Fair Trade
Squeezing coffee farmers to the last drop
 

  1. What does “Fair Trade Coffee” mean?

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  2. When “Fair Trade Coffee” farmers are guaranteed a minimum price for their coffee, what type of price is being put into effect? Where is this price usually set in relation to the equilibrium (market) price? What problem(s) tend to develop when this type of price is put in place?




  3. Under what market structure is coffee grown and sold as coffee beans? What about this market structure makes it difficult for coffee farmers to earn economic profits?




  4. When coffee is marketed under the “Fair Trade” name, what impact does this “Fair Trade” name have on market structure?




  5. What economies of scale can coffee farmers take advantage of if they join the “Fair Trade Coffee Association”?




  6. What are the benefits of "Fair Trade Coffee? What problems are associated with "Fair Trade Coffee?

 
 
 

Maximizing Profit

All firm's have the same objective - to maximize profit. Do firms ever continue operating if they are not earning a profit? Access Maximizing Profit Button from the McConnell web site. Why did the owners of the fictional motel keep the motel open even though they were taking a loss?
 

Pure Competition

Luigi's Pizza Kitchen is a price taker. It has the following hourly costs:
Output [pizzas per hour] Total Cost (dollars per hour) Average Variable Cost Average Total Cost Marginal Cost
0  $10      
1  $21      
2  $30      
3  $41      
4  $54      
5  $69      
6  $86      
  1. If pizzas sell for $15, what is Luigi's profit-maximizing output per hour? What is his economic profit (loss)? Your answer should show both the total and marginal graphical solutions.

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  2. If pizzas sold for $11 instead of $15, how many pizzas would Luigi now offer for sale? What is his economic profit (loss) now? Your answer should show both the total and marginal graphical solutions.

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  3. At what price will Luigi close sown his pizza shop? Why?

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  4. What is Luigi's short run supply curve? Explain verbally or graphically.

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  5. What price will cause Luigi to leave the pizza industry? What price will cause other firms with costs identical to Luigi's to enter the industry?

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  6. What is the long-run equilibrium price of pizza? What amount of economic profit will Luigi earn in the long run?

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Last updated October 21, 2004

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