Full Name: Trương Đình Lộc.

IBC04-K45
Answer 1:
Supply here is less than market demand. So market is disequilibrium. Scope of
increasing production is available. It may attract new suppliers to enter the market
until equilibrium of demand and supply is achieved.
Answer 2:
Market demand is still more than its capacity. Under this situation she has
following three options:
1. Maintain current production and raise the price. It is possible since supply is still
lower than demand. By raising price she can bring down demand and demand
supply equilibrium can be achieved. Here by raising price, she is reducing
consumers surplus and is raising her producers surplus. Since producers’ surplus is
raised at the cost of consumers, welfare of the society will not increase. Rather it
will create a monopoly environment which is not good for the society. It may
create a negative impact on consumers. It may affect future effective demand.

2. She can expand the production facility and supply more maintaining constant
price. It is a good idea from society’s point of view. It will increase consumers’
surplus as they can consume more. Also producer will be able to raise its total
profit. However greatest challenge is to maintain average cost level. With the
expansion of production capacity, very often law of decreasing return is found as
the production capacity has surpassed optimum manageable efficiency level of
production. So inefficiency will grow. Supervision will be loose. Result may be a
sharp rise in cost and decrease in profit.

3. Last option is to contract the production of pies to a national restaurant chain

who will give Shelly a share of profit for providing the business. Here greatest
challenge to her is the loss of market permanently to national restaurants. As they
are operating with more facilities and capacities, they can produce them cheaply.
So gradually they may start selling the pies at lower price. Facing this competition,
shelly will slowly and surely will loss the market. So she has to assure that this
option will not affect her market share in future.
Answer 3.
Comparing the above three options it appears that second option is the best one.
Here shelly will be able to strengthen her business and will contribute more to the
welfare of the society.