Background
Your friend intends to start a business selling bubble tea. He knows that you are currently taking a course in Business Economics. He has some questions regarding his new business and would like to seek your advice.
The bubble tea store will be situated at a rented HDB shop house unit with a floor area of 20 square meters. The store will only be selling one type of bubble tea which is the generic bubble milk tea. To set up the bubble tea business, your friend would need a fridge for storing of raw materials, a cooker, two mixers and a sealer to seal the cups. Currently your friend plans to run the store on his own and does not require any helper.
Within the vicinity of the rented HDB shop, there are a number of stores selling different beverages in addition to the 6 other stores selling bubble tea of different flavors. Besides the residents around the area, the other main group of customers is the school children from the nearby primary schools with an upcoming secondary school. With the recent conflict in Ukraine and the disruption to global supply chain, your friend has complained that it is becoming more difficult to obtain raw materials for bubble tea to operate his business.
Question 1
List down all the non-price determinant of demand. From the list, choose TWO that are most likely to affect the demand for bubble tea. Illustrate and explain how the demand of bubble tea can be affected and what will happen to the equilibrium price and quantity for bubble tea.
Question 2
List down all the non-price determinant of supply. From the list, choose ONE that are most likely to affect the supply of bubble tea. Illustrate and explain how the supply of bubble tea can be affected and what will happen to the equilibrium price and quantity for bubble tea.
Question 3
The Singapore Government has just announced that Goods and Services Tax (GST) will be adjusted from 7% to 9%. Illustrate and explain what will happen to the market for bubble tea. Does your friend has to bear the full burden on the increase in tax?
Question 4
You friend did an initial market research and found the following data:
Price per cup
Quantity sold per day
$2.00
400
$2.20
300
a) Help your friend to calculate the price elasticity of demand when the price change from $2.00 to $2.20. Explain to your friend how to interpret the price elasticity of demand
b) List down the factors affecting the price elasticity of demand. Use one of the factors to account for your calculation in part (a).
c) To increase total revenue, your friend intends to increase the price per cup of bubble tea. Will you advise him to do so? Illustrate and explain how he should adjust the price in order to increase total revenue.
Question 5
You friend did a projection on the cost of running the bubble tea business as follows:
Number of cups sold
Total cost per month
0
$600
100
$1,600
101
$1,602
a) Calculate the total fixed cost and total variable cost when he sold 100 cups of bubble tea. Give an example each for fixed and variable cost. (6 marks)
b) You friend is projecting that the sales of bubble tea will increase in the coming months. He thought that by just employing extra workers and raw materials, he is able to increase the sales of bubble tea indefinitely. Illustrate and explain to him why this is not possible using one of the production theory that you have studied. (12 marks)
c) Your friend is currently working as a technician and he is monthly salary is $3,500.00. He did an estimate of his expected cost in running the bubble tea business:
Rental of the store is $600.00 per month
Raw material cost is $500.00 per month
Utility bill is $400.00 per month
Rental of fridge and other machines is $500.00 per month.
He needs to withdraw $2000.00 from his saving account to pay for all the expenses. The bank pays 1.2% interest per annum.
His monthly revenue from selling bubble tea is $5,000.00.
Calculate the economic profit. Should your friend leave his job to operate this bubble tea business? What is the minimum number of cups of bubbles tea (priced at $2 per cup) should he sell to make it viable for him to quit his job? (12 marks)
Question 6
Which market structure does the bubble tea market falls under? Explain your answer using the characteristics of the market structure you have suggested.
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