Consider again the pizza market in Vancouver. Assume the daily demand for pizza is Qd= 32,900 − 600P, where P is the price of a pizza. The daily costs for a pizza company are the same as inworked-out problem 14.1 (page 496). They include $845 in fixed costs and variable costs equal to VC = 5Q+ Q2/80, where Q is the number of pizzas produced in a day. Marginal cost is MC = 5 + Q/40. Suppose that in the long run, there is free entry into the market and the fixed cost is avoidable. What are the long-run market equilibrium price and quantity? How many firms are active, and how much does each produce?
Now suppose that demand doubles to Qd = 65,800 − 1200P. If in the short run the number of firms is fixed (so that neither entry nor exit is possible) and fixed costs are sunk, what is the new short-run market equilibrium? What is the new market equilibrium in the long run?