Problem: For question below, how do you determine if firms are earning above normal profit:
Consider The Pizza Market In A Small College Town. Your question has been answered Let us know if you got a helpful answer. Rate this answer.
Question: Consider the pizza market in a small college town. Bookmark Consider the pizza market in a small college town with the following assumptions: The market is in long-run equilibrium. Each pizza shop sells 100 pizzas per week. (For ease of exposition, suppose that each shop sells only pizza and only one size.) Fixed cost for each shop is $500 per week. Price and elasticity for Salamandra's (s), Genoa's (g), Domino's (d), and Four Star (4) are: Ps = 11.00; Es = -2.2 Pg = 11.00; Eg = 2.75 Pd = 9.00; Ed = 1.8 P4 = 8.00; E4 = -2
If I calculate AVC for each and MR for each, how do I know if they are earning above normal profit?
| In the long run |
P=AC=ATC+AVC |
|
MR=Px *(1+(1/elasticity)) |
|
ATC = $500/100 |
|
$ 5.00 |
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AVC |
P |
MR |
|
|
AVC Salamandra = Pe-ATC |
$ 6.00 |
$ 11.00 |
6 |
|
|
AVC Genoa = Pe-ATC |
$ 6.00 |
$ 11.00 |
15 |
|
|
AVC Dominos = Pe-ATC |
$ 4.00 |
$ 9.00 |
14 |
|
|
AVC Four Star = Pe-ATC |
$ 3.00 |
$ 8.00 |
4 |
|