Problem 1. The Los Angeles Airport Commission has decided to sell the right to operate a coffee bar at the United Terminal. Starbucks and Coffee Bean are both interested in getting this exclusive right.

For Starbucks, the annual demand for coffee drinks is: Qs = 500,000 - 220,000Ps (where Ps is the price of a cup of Starbuck's coffee expressed in dollars)

For Starbucks, the long run total cost function (in costs per year, not including the payment to the Airport Commission) is: TCs = $50,000 + $0.6Qs

For Coffee Bean, the annual demand for coffee is: Qc = 400,000 - 200,000Pc (where Pc is the price of a cup of Coffee Bean's coffee expressed in dollars)

For Coffee Bean, the long run total cost function (in costs per year, not including the payment to the Airport Commission) is: TCc = $60,000 + $0.6Qc Assume that coffee is the only item being sold.

a) Are there economies of scale for the Starbucks and Coffee Bean shops? Explain briefly! b) What is the optimal price for each of the two operators? Show your work! c) What is the maximum annual amount that each company would be willing to pay the Airport Commission to get the exclusive right to operate? Show your work!