Part 1

A) Firm maximize their profitability where its marginal cost equals the marginal revenue; it is
the optimal condition that applies to most of the firm in order to maximize its profitability in
its operation. Firms generally operate at MR>MC in order to collect the profit, it can be
easily understood by comparison of per-unit cost and per-unit revenue (per unit cost <per
unit revenue). According to question EGS is selling organics and fair trade goods, is has also
the same pattern as traditional store in operation but it requires advertisement unlikely to
traditional grocery stores because it requires public awareness in order to maximize their
profit. People will only buy such kind of goods while they can make a distinction between
normal and organic commodity, know the benefit of organic products etc.
B) Price elasticity of demand measures the responsiveness of the price on the quantity
demanded in the market of respective goods. It means how the demand curve reacts with
respect to the fluctuation in the price of respective services and goods. There are three cases
of elasticity: if it is greater than 1 then considered as Elastic, if it is lower than one then it is
considered as inelastic and unitary elastic when it is equal to one. In this case, the manager
can easily understand the same while evaluating the business pattern of the different two
stores. For the store of Whyte avenue, it should be elastic but for the downtown is inelastic
because subsidization has a worse impact on the downtown store. It is the consequences of
inelastic demand that it does not matter prices are increasing or decreasing demand will
never change. Hence the amount of the subsidy on the downtown outlet is directly
converted into loss and is the major cause of the overall loss.

Part 2

A) Such kind of market set-up or business comes under the monopolistic competition.
Monopolistic competition is a kind of market where a large number of small business
operations and can sell similar differentiated products. According to the case, the store of
the organic goods and store of traditional grocery will create a monopolistic set-up or
market. In this market, people can have perfect information about the products of both
stores and they can consider their products as substitute goods. So we can say that EGS is
facing the monopolistic competition market with product differentiation and a large number
of the seller (grocery stores). We can say that EGS follow the same pattern because
 Product: The traditional groceries are also operating in that area; they are selling
the differentiated product but they are selling the substitute goods. Substitute
goods are the products for which consumer are indifferent while making choice
and consider only the availability and compare prices of the commodities.
 No of seller: According to case groceries have existed, it is the characteristic of the
monopolistic competition.
 The barrier to entry: There is some degree of entry barriers that exist in the market
because it needs goods knowledge of the operation and requires lots of
investments.
 Inefficiency: According to the case inefficiency exits because after subsidy it
returns the bad impact because of the downward sloping inelastic demand curve.

So we can conclude that EGS operate under monopolistic competition.

B) The managers of EGS firm have some control over the price, they can regulate the price of
goods for a limited level while differentiating their products to their competitor in the
market. Monopolistic completion has some degree of price control over the market because
 they actually try to detect the consumer group by creating a difference in the products of
the goods and services. For example, EGS creates differentiation by selling an organic
product, it can charge more unit price than the normal substitute goods. The reason which
enables such kind of market set-up to control over the price because of
 Brand value
 Product differentiation
 Loyal consumer base
 Control over some proportion of the market.

Part 3

As mentioned team EGS considering the two different alternatives with the help of a consultant.
Firstly, they are going with the operating only one outlet and secondly, they are considering the two
set-ups the new outlet by investing $60,000 for the initiation of the second alternative. In the set-up
of the new operation, the initial investment is considered as the sunk cost which is considered in
short-run but can consider in long run. So the consultant can evaluate only profitability for the
establishment of the news outlet.

a) First alternative: to operate only the initial outlet, we can make a conclusion about this
alternative by considering the overall profitability of this alternative. We know that the first
alternative is already making a supernormal profit and running smoothly. The overall
profitability can be calculated as the expected value of the profitability.
Expected profit =

n
E( profit )=∑ Pi∗profit
i=1
E(profit) = -28*0.05 + 22*0.15 + 31*0.3 + 45*0.25 + 52*0.25
= CA$35.45
So we can conclude that the initial outlet is making a profit of CA$35.45
b) Second alternative: To establish the new outlet in anywhere downtown it will need $60,000
initial investment. Ignoring the initial investment, we only compare the profit expected a
profit of that outlet compares to the initial outlet. If it will make good profit, then greater or
equals to the initial outlet then we can consider this as a potent outlet and go for it. So the
expected profit from the new outlet would be
n
E( profit )=∑ Pi∗profit
i=1
E(profit) = -45*0.1 + 33*0.1 + 42*0.2 + 55*0.3 + 62*0.3
 = CA$42.3
So we can conclude that change in location of the outlet will good for the business because
the expected profit of the new location is greater than the profit earned from the Whyte
avenue.
Recommendation: EGS should go for the opening of the new outlet at the new location
because it is making a supernatural profit which is CA$6.88 more. It is beneficial for the EGS
to open a new outlet.
Note: we are making this consideration by ignoring the initial cost or investment because
they are considered as the sunk cost.