Managerial Economics, Seventh ed. Economic tools for Today’s Decision Makers
3. Consider the pizza market in a small college town with the following assumptions:
a. The market is in long-run equilibrium.
b. Each pizza shop sells 100 pizzas per week. (For ease of exposition, suppose that each shop sells only pizza and only one size.)
c. Fixed cost for each shop is $500 per week.
d. Price and elasticity for Salamandra’s (s), Genoa’s (g), Domino’s (d), and Four Star (4) are:
i. Ps = 11.00; Es = -2.2
ii. Pg = 11.00; Eg = 2.75
iii. Pd = 9.00; Ed = 1.8
iv. P4 = 8.00; E4 = -2
4. Based on these assumptions, answer the following questions.
a. What market structure best describes the pizza market in this town? Explain.
b. What is average variable cost at this output level for each of the four shops? Explain how you derived this result.
c. Based on your answers to questions 4a and 4b and the first through fourth assumptions from Step 3, are any of these four firms earning above-normal profit? Explain your answer.