Question

Beware the Too-Easy Answer. Your city initially restricted the number of pizzerias to one. The existing monopolist sells 2000 pizzas per day. A pizzeria reaches the horizontal portion of its long-run average cost curve at an output of about 1000 pizzas per day. Suppose the city eliminates the entry restrictions.
In equilibrium, the number firms will be _ two.

Answer 1

With the improved entry of new competitor in the industry, prices will fall an thus the quantity demanded will be increased and thus will lead to an increased number of pizzas demanded which will be more than the existing quantity of 2000. Apart from this, the firms will be operating on the downward-sloping part of the average-cost curve once the zero profit point is reached, therefore every firm will be selling less than 1000 pizza , this is the main reason behind having only 2 firms in the long run equilibrium