Assume that a Bulgarian Wine Company, the BulgarWine, has the following cost structure for the year 1995.BulgarWine used old technology in year 1995 and suffered from inadequate marketing and brand recognition.

PriceMC AVC AFC

BulgarWine------2.5lv2.2 lv.0.5 lv

Wine Industry 4.25lv. 2lv.2 lv. 0.4 lv

(Average)

BulgarWine's market share= 4% of the Bulgarian wine market

Elasticity of demand for BulgarWine = -3

Elasticity of demand for the Wine Industry=-1.5

c)Assume that in 1997-1998, the grape supply decreased due to bad weather conditions, leading to a significant deterioration in company's cost structure as it was forced to purchase grapes at a higher cost than its competitors.This raised the MC of wine production for the company to 2.75 and its AVC to 2.5 whereas the AFC stayed the same at 0.5 lv.Should the firm stay in business in the short-run if it charged 2.5 lv per bottle of wine?Will the company generate short-run profits at this price?