Assume that coffee shops operate in a perfectly competitive industry.A single coffee shop,Brick & Mortar,decides to charge an entrance fee in addition to charges for its coffee and pastry.Which of the following is most likely to happen?
A)Brick & Mortar can continue to charge the entrance fee in the long-run since there is free entry into the coffee shop industry.
B)As long as the coffee shop industry is perfectly competitive,customers will be willing to pay the extra charges.
C)Brick & Mortar will not be able to sustain the extra charges as customers will move to coffee shops that are cheaper.
D)Brick & Mortar can charge their customers extra because there are a large number of buyers and sellers in the coffee shop industry.

Question

Quizplus · Accepted Answer

In a perfectly competitive industry, all firms are price takers and cannot charge higher prices than their competitors without losing customers. Therefore, in the long-run, Brick & Mortar will not be able to sustain the extra charges as customers will shift to other coffee shops that are cheaper. This is because there are numerous other coffee shops in a perfectly competitive industry, and there are no entry barriers, so other firms can easily enter and compete with Brick & Mortar if they set lower prices.

Assume That Coffee Shops Operate in a Perfectly Competitive Industry