Part I.

Your friend Ethel, owner of Ethel!s "Bar-B-Que Cafe" which specializes in blue plate specials of barbecued chicken, has asked you to help her with her pricing. Your studies reveal that Ethel's fixed cost for the rent is $500 per month, and the cost of the food and labor is $1.50 and $1.00 respectively for each meal served.

A) Ethel wants to know how many meals she must serve at the current price of $3.50 to cover all her costs.

B) What will happen if the price is raised to $5.00? Explain. C) What will happen if the price is lowered to $3.00? Explain.

Part II.

The national chain of "Bar-B-Ques 'R' Us" has opened a new outlet across the road from Ethel's cafe. They also specialize in barbecued chicken meals which sell for $2.79.

A) Is it possible for Ethel to still make a profit, and if so, under what circumstances? Explain.

Part III.

Ethel and the national chain store are in a price war. They both are selling meals at $2.51.

A) Is it still possible (in theory at least) for Ethel to make a profit, and if so, under what circumstances? Explain.

Part IV.

The price war continues with blue plate specials going for $2.50.

A) Can Ethel ever make a profit at this price? Explain why.

B) What would an income statement show as its bottom line under these conditions?

C) If Ethel believes the price war will end soon, in the short run, what is your best advice to her so she minimizes her losses and doesn't lose her customers? Explain.

D) If Ethel believes the lower prices will continue for the long-run, what is your advice to her? (Note, Ethel refuses to own and run any other concern other than her family's historic, old cafe, and she also refuses to change anything else due to long-standing "tradition".)

E) Can Ethel make a profit in the long-run at this sales price for her product? Will she be forced out of business or into bankruptcy at this sales price? Explain.

Part v.

The price war has heated up with chicken dinners selling for .$1.50 each. A) What should Ethel do to minimize her losses? Explain.

B) If Ethel doesn't follow your advice what will happen to her operating profit or loss? Explain.

C) If the new low price is just for the short run and Ethel doesn't want to risk losing her loyal c~stomers, should she do anything different than you advised above? What should she-do different? Explain.

D) If the new low price turns out to be permanent for the long-run, will Ethel ever show a profit. What should she do under these long run circumstances?