Question

The burrito truck industry in the city is perfectly competitive. On any given evening, the market demand for burritos is given by

??=58−?

where ?? is the quantity of burritos demanded per evening, and ? is the price of a burrito.

Each burrito seller must pay $40 per day to rent a burrito truck. In addition, the cost of ingredients for each burrito is $4, regardless of how many burritos are sold. Given space constraints, each burrito truck is able to serve a maximum of 10 burritos per evening.

a) Suppose the market is in equilibrium with a quantity demanded of 55 burritos. The sellers in the market must be, on average, earning profits that are (negative/positive).

b) Which of the following statements is correct?

Choose one OR MORE:

A.The price of burritos will eventually be lower.

B.The equilibrium this market is in must be a short-run equilibrium.

C.The equilibrium number of sellers will eventually be larger.

D.The equilibrium this market is in must be a long-run equilibrium.

Answer 1

a. For burito seller, Fixed cost = 40; AVC=MC=4

Since equilibrium quantity QD=55, p = 58-QD = 3.

In perfect competition P=MR=3 while MC=4. As MC>MR, the sellers in the market are on an average earning negative profits.

b. option A is incorrect because P<MC and for perfect competiton P=MC and so prices should increase in the long run for P=MC. So price must rise.

option B is correct because it is only in the short run of a PC framework that producers can go on producing even with losses. As they go on producing, the fixed cost gets mitigated and they earn zero economic profits in long run.

option C is incorrect, because, the producers are already making losses. So there is no economic profit which can allow for more sellers to enter.

option D is incorrect because in long run P=MR=MC, which is not at all the case here