Question

Suppose the restaurant industry is perfectly competitive. All producers have identical cost curves and the industry is currently in long-run equilibrium, with each producer producing at its minimum long-run average total cost of $8.
a. If there is a sudden increase in demand for restaurant meals, what will happen to the price of a restaurant meal? How will individual firms respond to the change in price? Will there be entry or exit from the industry? Explain.


b. In the market as a whole, will the change in the equilibrium quantity be greater in the short-run or the long-run? Explain.


c. Will the change in output on the part of individual firms be greater in the short-run or the long- run? Explain and reconcile your answer to part (b).

Answer 1

Answer:

Explanation:

A. Supply stays the same, demand decreases since restaurants are normal goods. As a result, the equilibrium price and the equilibrium quantity will go down.

B. In the short run, the existing firms reduce their output causing Q* to fall. In the long run, as firms exit, Q* falls even further.

C. An individual firm may produce in the short run, but exit from the industry in the long run. As a result, the firm will decrease its quantity produced up to 0. Therefore, in the long run the output of an individual firm may change drastically comparing with the short run.