Question

Assume that restaurants are in monopolistic competition in Melbourne. Looking at the cost incurred by firms operating in a monopolistic market, what is the impact of a curfew on the profit/losses made by Melbourne restaurants in the short run? What could happen in the long run? Provide a graphical representation of the equilibrium of the firm in the short run and in the long run.

Answer 1

A monopolisitic can earn profits or losses in the short run but not in the long run. Let the intial equilibrium in the economy occurs at point E where marginal revenue of the firm is equal to marginal cost of the firm and firm is charging OP* where price is equal to minimum of average cost of the firm. Disruption in the supply chain due to curfew will increase cost of production of the firm shifting the MC and AC curves upwards to MC' and AC' and firms will start earning losses represented by red shaded area at the short run equilibrium.

This will lead to exit of some firms from the industry and demand curve faced by each existing firms will shift rightwards unit prices rises again to the new minimum point of average cost of the firm and firms will be making only normal profits in the long run.