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1) Consider the city of Silver Spring, where zoning laws limit the number of video arcades to one. The city's only video arcade has a price of $0.50 per game with an average cost of $0.34 per game. Suppose that the city eliminates its restrictions on video arcades, allowing additional firms to enter the market, "Each additional video arcade will decrease the price of games by $0.02 and increase the average cost of providing video games by $0.03".
What is the equilibrium number of video arcades?

2) The city of Columbia uses zoning laws to restrict the number of pizzerias. Under a proposed law, the restrictions on pizzerias would be eliminated. Consider the following statement by an expert in the pizza industry:" A pizza reaches the horizontal portion of its long -run average cost curve at an output of about 1,000 pizzas per day. The city's existing pizzeria sells 3,000 per day. Based on these facts, I predict that if the city eliminates the restrictions on pizzerias, we will soon have three pizzerias (3,000pizzas/ 1,000 pizzas per pizzeria)". If we assume that the expert's facts about production costs are correct, is the expert's conclusion (three pizzerias) correct?

3) Consider the "Fixed Cost and Entry" experiment. Suppose the fixed cost per day is $18.00 per firm and the marginal cost is $4.00. Each firm can cut up to three lawns per day. The market demand curve is linear, with a vertical intercept of $70.00 and a slope of -$1.00 per lawn. Predict the outcome of the experiment, including the equilibrium price, quantity and number of firms. Please explain the reasoning behind your predictions.

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Solution Summary

The equilibrium number is determined.

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