Question

Please answer PARTS I AND J. I have seen multiple people request answers specifically to these two questions and no answer that I can find has given them! Thanks

1. Consider the market for tacos sold by food trucks in Pittsburgh. Consider each taco truck to be an individual firm with the same cost function c(q)=F+q2, where F represents fixed costs of equipping a food truck and q represents the number of tacos produced. In addition, there is a market demand of D(p)=500-20p for tacos.

f. Now consider the long run with free entry and exit. Determine the output of each food truck and the price in the market for which no firm will have an incentive to enter or exit.

g. Determine the equilibrium price and total quantity produced in the long run. How do these depend on F? Explain.

h. How many food trucks will be in this market in the long run? How does this depend on F? [For simplicity assume the formula for number of firms produces an integer so you don’t have to worry about rounding.]

i. In the long run does each firm earn positive, negative, or 0 profits. How does this depend on F? Explain.

j. Suppose now that the government imposes a licensing fee of T, where T > 0, on each food truck. What is the effect in the short run? In the long run?

Answer 1

i. as there are free entry and exit of firms, each firm will earn zero economic profit. the more is the value of F the lesser will be the firms entering.

as each firm will produce as their MC=price hence if there are any economic profit is there let's say nxM where n is the existing number of firms and M is the profit of each firm. then to make the value of total economic profit to zero let's say m firms will enter. now the formula determining the number of firms will be m=M/F+q*2 hence the lager the value o F lesser will be the firms entering.

j. if the government imposes a licensing fee of T it will add up to the fixed cost and the total fixed will become F+T and the total cost will become F+T+q² but the marginal cost will still remain the same. hence the short-run production of each firm will remain the same. but in the long run, due to the increased fixed cost the total entry of the firm will be less hence total production, in the long run, would fall than the level without the licensing fee.

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