Microeconomic decisions in the Real World

Situation Two: (3 marks)

It is a hot July day and your 10-year-old relative wants to set up a lemonade stand. You think that is a great idea and help them mix up a batch of lemonade. You set up a stand and set the price of one glass of lemonade at $1 dollar per glass. Business is good, but then you notice another kid down the block has also set up a lemonade stand. They price their lemonade at 75 cents per glass. Business drops off immediately...now what?

Questions:

1. What options does your little relative have?
2. What do you advise your little relative to do?
3. What price would you recommend they set after the competitor sets up their stand?

Hint: Relate all your answers to supply and demand.