Consider the following economic scenario: The first sushi restaurant opens in a
ID: 1227823 • Letter: C
Question
Consider the following economic scenario: The first sushi restaurant opens in a city. People are initially cautious about eating sushi, until an influential health report warns consumers against grilled meat and suggest that they increase their consumption of raw fish. As a result, demand for sushi increases dramatically. Assuming that the market for sushi is perfectly competitive, answer the questions below.
a. In the story above, what should have happened to the short-run economic profit of the sushi restaurant as a result of the health report?
b. Assuming that demand remains high, what do you anticipate will happen to the number of sushi restaurants in the city over the long run?
c. Suppose the sushi industry is a constant cost industry. Would you predict that the first sushi restaurant would be able to sustain positive economic profit over the long run? Explain your answer.
d. Using one graph of the market as a whole and one graph of a representative firm’s cost curves, illustrate your answers to parts a – c.
e. Local steakhouses suffer from the popularity of sushi and start incurring economic losses. What will happen to the number of steakhouses in town in the long run? Explain your answer.
Explanation / Answer
a. In the story above, what should have happened to the short-run economic profit of the sushi restaurant as a result of the health report?
The short-run economic profit of the sushi restaurant wili rise. It will induce others to open sushi restaurant.
b. Assuming that demand remains high, what do you anticipate will happen to the number of sushi restaurants in the city over the long run?
The number of sushi restaurants in town will increase over the long run.
c. Suppose the sushi industry is a constant cost industry. Would you predict that the first sushi restaurant would be able to sustain positive economic profit over the long run? Explain your answer.
Over long run, as the supply of sushi restaurants increases, the equilibrium price of sushi will decrease, which will lower the short-run profit of the original sushi restaurant.
e. Local steakhouses suffer from the popularity of sushi and start incurring economic losses. What will happen to the number of steakhouses in town in the long run? Explain your answer.
Because owners incur losses, the number of steakhouses in town will decrease in the long run, and exit from the industry.