1. In the greater Stony Brook area there are many mom-and-pop pizza places. Despite their large...

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1. In the greater Stony Brook area there are many mom-and-pop pizza places. Despite their large number and great similarities in terms of costs and menus, each enjoy some degree of market power, because they differ in their location, recipes, etc. Assume that all pizza places that are in business must rent a specialized pizza oven for F dollars per year and then can produce as many pies as desired, of any type, at a cost of c dollars per pie. There is free entry in that anyone can open up a pizza place, as long as they are willing to rent the required oven. Assume that each pizza shop faces a demand curve given by Q = s[1/7-b (P-P)] where P is the average price in the market, P is the price charged by this particular shop, S is the overall demand for pizza in the market, and n is the number of shops in business. b is a parameter governing how price-sensitive buyers are. (a) Construct the diagram used to study the determination of the price P and number of shops n in this market, under free entry and a symmetric equilibrium. (b) Due to entry by a new supplier, the rental price for ovens falls to Fnew < F. Use your diagram to work out the consequences of this change for the price of pizzas and the number of shops in the market. Are consumers better or worse off as a consequence? What happens to the markup charged by firms? 1 (c) A "health guru" makes waves in the media with exaggerated claims about the dangers of gluten. As a consequence, overall demand for pizzas in the market falls to Snew < S. What happens to pizza prices, the markup charged, and the number of shops? What are the welfare consequences of this trend for the consumers that do continue to buy pizzas? 1. In the greater Stony Brook area there are many mom-and-pop pizza places. Despite their large number and great similarities in terms of costs and menus, each enjoy some degree of market power, because they differ in their location, recipes, etc. Assume that all pizza places that are in business must rent a specialized pizza oven for F dollars per year and then can produce as many pies as desired, of any type, at a cost of c dollars per pie. There is free entry in that anyone can open up a pizza place, as long as they are willing to rent the required oven. Assume that each pizza shop faces a demand curve given by Q = s[1/7-b (P-P)] where P is the average price in the market, P is the price charged by this particular shop, S is the overall demand for pizza in the market, and n is the number of shops in business. b is a parameter governing how price-sensitive buyers are. (a) Construct the diagram used to study the determination of the price P and number of shops n in this market, under free entry and a symmetric equilibrium. (b) Due to entry by a new supplier, the rental price for ovens falls to Fnew < F. Use your diagram to work out the consequences of this change for the price of pizzas and the number of shops in the market. Are consumers better or worse off as a consequence? What happens to the markup charged by firms? 1 (c) A "health guru" makes waves in the media with exaggerated claims about the dangers of gluten. As a consequence, overall demand for pizzas in the market falls to Snew < S. What happens to pizza prices, the markup charged, and the number of shops? What are the welfare consequences of this trend for the consumers that do continue to buy pizzas?

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a This is a model of monopolistic competition We can diagram it using the firms marginal reve... View the full answer