Question

1. Consider the market for tacos sold by food trucks in Pittsburgh. Consider each taco truck to be an individual firm with the same cost function c(q)=F+q2 , where F represents fixed costs of equipping a food truck and q represents the number of tacos produced. In addition, there is a market demand of D(p)=500-20p for tacos.

a. In the long run does each firm earn positive, negative, or 0 profits. How does this depend on F? Explain.

b. Suppose now that the government imposes a licensing fee of T, where T > 0, on each food truck. What is the effect in the short run? In the long run?

Answer 1

a). as there are free entry and exit of firms, each firm will earn zero economic profit. the more is the value of F the lesser will be the firms entering.

as each firm will produce as their MC=price hence if there are any economic profit is there let's say nxM where n is the existing number of firms and M is the profit of each firm. then to make the value of total economic profit to zero let's say m firms will enter. now the formula determining the number of firms will be m=M/F+q*2 hence the lager the value o F lesser will be the firms entering.

b). if the government imposes a licensing fee of T it will add up to the fixed cost and the total fixed will become F+T and the total cost will become F+T+q2 but the marginal cost will still remain the same. hence the short-run production of each firm will remain the same. but in the long run, due to the increased fixed cost the total entry of the firm will be less hence total production, in the long run, would fall than the level without the licensing fee.