HOMEWORK 8

1. Draw demand for experiment 8.1.  How many restaurants entered in
Experiment 8.1? Draw the short run supply (that is, supply of meals given
the number of restaurants). 

2. The long-run supply is, for each price, the quantity that the market
is willing to supply when the number of restaurants is not held fixed. 
How many restauranteurs open restaurants if the price is *11 (that is,
they can sell all they want at a price of *11)?  At a price of *9?  Draw
the long run supply on your diagram. 

3. (short answer) Why would a restaurant be willing to sell for a price
less than its average total cost?

4. What is the short run equilibrium price?  The long run equilibrium
price?

5. Did restaurants lose money on average in experiment 8.1?  The theory
predicts that the number of restaurants should rise or fall depending on
whether the restaurants are making or losing money.  Was this confirmed?

6. Did average prices move closer to long run equilibrium?

7. Did anyone chose to exit in experiment 8.3?  Why?  Draw the new demand
curve and short run supply curve.  What is the short run equilibrium price
and quantity? How well did the theory work in predicting average price and
quantity?

8. Add the long run supply curve to your diagram.  Did prices and
quantities move toward the long run equilibrium?

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STORY

Here is a news story, related to entry and exit, that you might find
interesting.  Based on a story in the Wall Street Journal, February 6,
1996, By Michael Selz.

Amid Brewpub Binge, Sobering Tales

This story begins by saying: "Eager entrepreneurs are pouring into the
booming brewpub business--and some have wound up with hangovers.

It reports that brewpubs "can produce a glass of beer for less than 30
cents and sell it for up to $5. " 

It goes on to say that " The numbers don't add up quite so neatly for Dave
Richards, co-owner of Rio Bravo Brewpub, Inc." Mr. Richards had a highly
successful brewpub in Albuquerque N.M. and so he and his sister decided to
open one in Santa Barbara, Calif, the next year. According to the story,
"In California though, business went flat." The cost of brewing equipment
was $20,000 higher than expected, so that the break-even point in Santa
Barbara was sales of $2,000 per day. Flooding early in the year chased
away tourists and on many days the brewpub brought in as little as $700
per day.

According to the story, 190 new brewpubs opened in the U.S. in 1995. This
was nearly as many as the total number that had opened in the previous 3
years. But, it says, dozens of others are closing and many others are
struggling.