The Thai food restaurant business in Evanston, Illinois, is monopolistically competitive. Suppose that each existing and potential restaurant has a total cost function given by TC = 10Q + 40,000, where Q is the number of patrons per month and TC is total cost per month. The fixed cost of $40,000 includes fixed operating expenses (such as the salary of the chef), the lease on the building space where the restaurant is located, and interest expenses on the bank loan needed to start the business in the first place.
Currently, there are 10 Thai restaurants in Evanston. Each restaurant faces a demand function given by , where P is the price of a typical entrée at the restaurant, P is the price of a typical entrée averaged over all the other Thai restaurants in Evanston, and N is the total number of restaurants. Each restaurant takes the prices of other Thai restaurants as given when choosing its own price.

a) What is the own-price elasticity of demand facing a typical restaurant?

b) For a typical restaurant, what is the profit-maximizing price of a typical entrée?

c) At the profit-maximizing price, how many patrons does a typical restaurant serve per month? Given this number of patrons, what is the average total cost of a typical restaurant? 

d) What is the long-run equilibrium number of Thai restaurants in the Evanston market?

Transcribed Image Text:

Q= 4,000,000 N P-5P+