Econ 355
2. Assume a new Mexican restaurant, specializing in burritos, wants to open on Green street. Assume the restaurant has some market power over the price they set, and that they face a fixed cost of setting up a restaurant.
- a. Illustrate graphically how they choose how many burritos to sell, and at what price (hint: illustrate the demand curve they face). Show their profit.
- b. Assume that each firm sets its price at pi = 1/(bn) + c, and have average costs of AC = Fn/Qtot + c. 'b' is 1/50, where 'c' is the marginal cost of $2 per meal and F is a fixed cost of $25,000. If market is 50,000 meals per week, how many restaurants can Green street support? What price will they charge for their meals?
c. Explain intuitively what would happen to Chipotle's elasticity of demand if the burrito place opens up next door (where Chipotle is a competing burrito place)? What does this imply about the markup (p/mc) that Chipotle can now charge?
d. Assume Green street enters into trade with downtown Champaign, where downtown Champaign produces beer and Green street produces food after trade. What happens to price of food on Green street after trade? How does your answer change if the restaurant industry is a perfectly competitive industry? Explain.
e. Using your graph in (a) illustrate how this new entry affects sales and profits at Chipotle.