Question

Suppose the pizza market in the S.U. area is competitive. Assume the market is in a...

Suppose the pizza market in the S.U. area is competitive. Assume the market is in a long run competitive equilibrium.

  • Graphically represent the pizza market. Be sure to show two pictures, one representing the pizza market and the other representing the individual pizzeria.

  • Suppose there is a large increase in student enrollment at S.U. How will this affect the market for pizza and the profits of the individual pizzeria? Explain and demonstrate on your graphs from part a. If the individual pizzeria is making a profit, be sure to clearly label the size of the profit on your graphs.

  • Based on your answer in part b, what adjustments will occur in this market overtime? Explain and demonstrate on your graphs from part a.

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Answer #1

Large increase innstudents enrollment leads to rise in demand for pizza.

Demand curve shifts rightwards from D1 to D2. Equilibrium Price level rises from P1 to P2 in the market.

Equilibrium in the firms market moves from A to B.

a. Positive economic profit= Area of rectangle below P2 above ATC bounded by Q2.

b. For firms Price is greater than Average Total cost now. So firms are earning positive economic profit now. New firms will enter the market, this will drive down the Profit earned by individual firm.

So in the long run, firms will again start to earn normal profit.

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