The daily demand for pizzas is Qd = 740 - 20P where P is the price of a pizza. T

Question

The daily demand for pizzas is Qd = 740 - 20P where P is the price of a pizza. The daily costs for a pizza company initially include $50.00 in fixed costs (which are avoidable in the long run but sunk in the short run), and variable costs equal to (Q^2/2) where Q is the number of pizzas produced in a day. Marginal cost is Q Suppose that in the long run there is free entry into the market. Assume fixed costs fall to $18 and, in the short run, the number of firms is fixed (so that neither entry nor exit is possible) and fixed costs are sunk.

. What is the new market equilibrium in the short run?

     Q* =  pizzas.

     P* = $.

     There are____ firms in the short run.


b. What is the new market equilibrium in the long run?

     Q* =  pizzas.

     P* = $.

     There are____ firms in the long run.

Explanation / Answer

In the sort run, the total cost is

TC = 18 + q^2/2

hence, average total cost = TC/q

= 18/q + q/2

Now, in equilibrium , ATC = MC

MC = q

Hence, 18/q + q/2 = q

18/q= q/2

q^2= 36

Hence, q = 6

But, however in equilibrium MR= MC, so there is zero economic profit

Hence, MR = MC=q = 6

Hence, the equilibrium price should be = 6

Hence,total demand in a market = 740-20p

Hence, total demand = 740-20(6)

Total demand = 620

Hence, there shoul be total = 620/6= 103.33

Hence there shoul be 104 firms in the short run

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