DO NOT COPY AND PASTE FROM ANOTHER CHEGG QUESTION Consider t

DO NOT COPY AND PASTE FROM ANOTHER CHEGG QUESTION

Consider the pizza market in a small college town with the following assumptions:

The market is in long-run equilibrium.

Each pizza shop sells 100 pizzas per week. (For ease of exposition, suppose that each shop sells only pizza and only one size.)

Fixed cost for each shop is $500 per week.

Price and elasticity for Salamandra\'s (s), Genoa\'s (g), Domino\'s (d), and Four Star (4) are:

Ps = 11.00; Es = -2.2

Pg = 11.00; Eg = 2.75

Pd = 9.00; Ed = 1.8

P4 = 8.00; E4 = -2

Based on these assumptions, answer the following questions.

a. What market structure best describes the pizza market in this town? Explain.

b. What is average variable cost at this output level for each of the four shops? Explain how you derived this result.

c. Based on your answers to questions 4a and 4b and the first through fourth assumptions from Step 3, are any of these four firms earning above-normal profit? Explain your answer.

Solution

a) Notice that every seller is charging different price and have high elasticity of demand. Also the good is similar that is homogenous and there is not much price differential and there is no leader as everyone sells same output per week. Sellers are price maker, goods are homogenous and elasticity is generally high in differentiated monopolistic market. Thus it descrobes the monopolistic market at best.

b. Firms are running in long run equilibrium implying that price should be equal to average cost

Price = AV

and Price = Average fixed cosr + average variavle cost and average variable cost is 500/100 = 5 as output and fixed cost is same for everyone

and average variable cost is thus

AVC = Price - 5 for each firm.

use the above formula to find avergae variable cost.

c) Profit = TR - TC = P*Q - (FC+(AVC*Q))

Use the abaove formulaa to calculate profit of all

As you can see the TR equals TC of all firm and profit is zero hence no firms is earning more than normal profit.