Question

The city that has a number of poutine food trucks operating throughout the downtown area. Suppose that each food truck has a marginal cost of $1.50 per meal sold and no fixed cost. Suppose the maximum that any food truck can sell is always 100 meals per day.

(a) (5 points) If the price of a meal is $2, how many meals does each vendor want to sell?

(b) (5 points) If the industry is perfectly competitive, will the price remain at $2 for a hot dog? If

not,what will the price be?

(c) (5points)Ifeachvendorsellsexactly100mealsadayfor$2each,andthedemandformeals from food trucks in the city is Q = 4400 − 1200P , how many food trucks are there? Is this the same number of food trucks that will exist in the long run? If yes, explain why. If not, how many would there be?

(d) (5 points) Suppose the city decides to regulate food trucks by issuing permits. If the city issues only 20 permits and if food truck continues to sell 100 meals a day, what price will a meal sell for?

(e) (5 points) Suppose the city decides to sell the permits and we are still in the short run equi- librium where the price is $2. What is the highest price a vendor would pay for a permit?

Answer 1

b) If the industry is perfectly competitive, in the long-run, the price need not remain at $2 for a hotdog. Because, the condition is that P = MC, it can come down to $1.50 in the long-run.

c) Aggregate demand: Q = 4400 – 1200P

1200P = 4400 – Q

P = (4400 – Q)/1200 or P = 11/3 – 1/1200Q

MR = 11/3 – 1/600Q

MR = MC

11/3 – 1/600Q = 1.5 or 3/2

1/600Q = 11/3 – 3/2 = 13/3

Q = 13/3 x 600 = 2600

Since each vendor sells 100 hotdogs, number of sellers in the market = 2600 / 100 = 26 vendors.

d) If the vendors are restricted to 20, then market quantity shrinks to 2000.

2000 (Q) = 4400 – 1200P

1200P = 4400 – 2000

P = 2400 / 1200 = $2.

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