Question

The city of Summerfell initially allows only one Pizzeria to operate. The existing monopolist sells 3,000 pizzas per day, and faces the horizontal portion of the long-run average cost curve at an output of about 1,000 pizzas per day. Suppose the city eliminates the entry restrictions. Predict the equilibrium number of pizzerias. (Beware the too easy to be correct answer).

Answer 1

Because there is a restriction in the market on the entry of new firms, currently there is only one pizzeria. It is currently producing 3000 pizzas. With the removal of restriction, there will be entry of new firms that will drive down the price. As the price decreases, more consumers will demand pizzas, so quantity demanded will be greater than 3000 pizzas. In the long run there will be 1000 Pizzas delivered by one firm but the demand is greater than 3000 pizzas. So there will be more than three pizzerias, however the actual number cannot be predicted without having demand information.