Economic Analysis of Cafe Cartagena: A Case Study Report

This economic case study analyzes the operations of Cafe Cartagena, a coffee shop operating on Sundays. The study examines the impact of government regulations on the cafe's costs and profits, specifically focusing on changes in penalty rates for employee wages. It calculates accounting and economic profits, differentiating between explicit and implicit costs. The analysis explores average total cost, the concept of sunk cost, and the market demand elasticity faced by the cafe. The case study further evaluates the cafe's decisions regarding production capacity and hiring, considering the competitive market environment. It provides a detailed breakdown of revenue, costs, and profits before and after a reduction in penalty rates, illustrating the impact of these changes on the cafe's financial performance. The assignment concludes with a discussion of the cafe's strategic choices and their rationale within the given market conditions.

Running head: ECONOMIC CASE STUDY ANALYSIS
ECONOMIC CASE STUDY ANALYSIS
Name of Student:
Name of University:
Author Note:

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ECONOMIC CASE STUDY ANALYSIS
TABLE OF CONTENT
TASK-1:.....................................................................................................................................2
TASK 2:.....................................................................................................................................4
TASK 3:.....................................................................................................................................4
TASK-4:.....................................................................................................................................5
TASK-5:.....................................................................................................................................5
REFERENCE.............................................................................................................................7

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ECONOMIC CASE STUDY ANALYSIS
TASK-1:
The Café Cartagena operated 10 hours on each Sunday and has 5 employees. The
penalty rates given imposed by the government for working on Sundays are $40 per hour.
This let the employees earn $400 each on Sunday. The cost of salary for the café owners is
400*5=$2000. The others costs including coffee cups and electric charges are $500. The cost
of coffee machines is $1000. All these summed up to derive the accounting or explicit cost of
the café. This amount fell when government reduced the penalty rate to $20 and that further
reduced total accounting cost. The implicit costs are being the opportunity cost the firm
undertakes for running the coffee shop on Sundays.
The economic profit and accounting profit figure also changed and shown in the
following tables.
Total Revenue from sales per Sunday $12,000
Explicit Cost
Wages to employees $2000
Other costs (Coffee cups, electric etc) $500
Cost of coffee machine $1000
Total Explicit Cost $3500
Accounting Profit (less Explicit Cost) $8500
Table 1: Accounting Profit (Before Cut)

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ECONOMIC CASE STUDY ANALYSIS
Total Revenue from sales per Sunday $12,000
Explicit Cost (After Cut in Penalty Rate)
Wages to employees $1000
Other costs (Coffee cups, electric etc) $500
Cost of coffee machine $1000
Total Explicit Cost $2500
Accounting Profit (less Explicit Cost) $9500
Table 2: Accounting Profit (After Cut)
Total Revenue from sales per Sunday $12,000
Implicit Cost
Rent of coffee shop on Sunday $1500
Total sacrifice made from withdrawing cash from bank $400
Total opportunity cost of owning business over job $800
Total Implicit Cost $2700
Total Explicit Cost $3500
Economic Profit (less Explicit Cost and Implicit Cost) $5800
Table 3: Economic Profit (Before Cut)
Total Revenue from sales per Sunday $12,000
Implicit Cost (After Cut in Penalty Rate)
Rent of coffee shop on Sunday $1500
Total sacrifice made from withdrawing cash from bank $400
Total opportunity cost of owning business job $800

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ECONOMIC CASE STUDY ANALYSIS
Total Implicit Cost $2700
Total Explicit Cost $2500
Economic Profit (less Explicit Cost and Implicit Cost) $6800
Table 4: Economic Profit (After Cut)
TASK 2:
The average total cost defines the per unit cost of production. This can be derived by
dividing total cost by total units of coffee sold. At this point, we consider total cost to be total
accounting cost hence
ATC= TC/Q
= $3500/4000
= $0.875
After the cut in penalty rate by the government the total accounting or explicit cost
fell to $2500 that further reduced average total cost equals to $2500/4000= $0.625
TASK 3:
The concept of sunk cost refers to the cost made in production that can not retrieved
or recovered back by any means. This is similar to fixed cost incurred in any production with
only difference being fixed cost is the payment made inform of investment or contractual
deal and can have possibility to be revered with higher scale of production and sales that
would generate more revenue and profit. Higher ale would die down the fixed cost incurred
with falling average and total cost of production and service. This combined with higher

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ECONOMIC CASE STUDY ANALYSIS
revenue earned reaps higher profit and the fixed cost becomes recovered over time. However,
sunk cost is different. It is more like onetime payment or cost incurred that have no
possibility or scope to be recovered by means of production, sales or any strategies. In our
case study, the Café incurs explicit cost and implicit cost respectively. Before the cut in the
penalty rate there has not been any sunk cost in the business since all the costs made for
paying the salary of employees, other cost including electric, coffee cup etc, cost of coffee
machine and the opportunity cost of selling coffee on Sunday in Cartagena.
After the government reduced the penalty rate of working on Sunday from $40 to $
20, the café incurred lower explicit cost with implicit cost remaining same. This increased the
economic profit and accounting profit both in terms of extra earning. This induced them to
celebrate and for that they drew cash of $1000 which they never returned. Now this amount
can be treated as sunk cost, because this cannot be retrieved back through the means of
selling coffee that also under no action taken by them in order to sale more and earn more
profit.
TASK-4:
Cartagena operates in an extremely competitive market. Due to that they can not
increase the price per cup of coffee in the shop because they know doing so will reduce the
consumers of their service and that can be drastically low up to zero also. However, the
owners have the ability to sell any number of coffees at the prevailing price of $3.00 per cup
of coffee. This leads to elastic demand curve since for one unit increase in price no matter
how small, the change in demand is infinitely large and falls to zero making the slope of the
demand curve infinite and it looks like horizontal line.

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ECONOMIC CASE STUDY ANALYSIS
TASK-5:
Due to operating in highly competitive market, they knew that they won’t be able to
make any changes in prices since that would lead to greater fall in the demand ultimately
incurring loss. But they had the opportunity of increasing sales up to any units more than they
did on each Sundays. Operating at their full capacity they were able to sell 4000 cups of
coffees per Sunday. When the government reduced penalty rate it reduces accounting cost of
the firm and increasing the economic profit than before. At this point they could hire more
employees since per employee salary cost now reduced to half of the amount incurred
previously. Utilizing the lower penalty rate, they could easily higher more and sell more to
earn more. But they did not do so. Apparently, their decision might seem irrational but they
actually took good decision. To justify this it can be highlighted from the case study that they
were operating at full capacity. No matter how much more they employ, it was not possible to
earn more if the capacity was not expanded. To extend and expand the capacity of production
business plan and larger cost would have to be incurred. Moreover this takes time too since it
is long run concept. Therefore, their decision was perfectly right as per my analysis.

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ECONOMIC CASE STUDY ANALYSIS
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