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) 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

In this case the marginal cost is $1.5 per meal sold , a firm would want to sell at the points where the marginal cost is equal to the marginal revenue. Since the marginal cost per unit of production is less than the marginal revenue that $2, the firm would want to sell all the 100 meals per day. Here we use the formula P=AR=MR(Perfect competition). If he firm produced all the 100 units of meals the the marginal cost will be and the marginal revenue will be . So here the marginal cost is less than the marginal revenue. In this situation the firm is making the marginal profit.

b) The maximum price the vendor would pay for the permit would be , that is . The maximum number meals that can sell is alwys 100 so we multipy it with the short-run price