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The first sushi restaurant opens in town
The first sushi restaurant opens in town. Initially people are very cautious about eating tiny portions of raw fish, as this is a town where large portions of grilled meat have always been popular. Soon, however, an influential health report warns consumers against grilled meat and suggests that they increase their consumption of fish, especially raw fish. The sushi restaurant becomes very popular and its profit increases.
a. What will happen to the short-run profit of the sushi restaurant? What will happen to the number of sushi restaurants in town in the long run? Will the first sushi restaurant be able to sustain its short-run profit over the long run? Explain your answers. b. Local steakhouses suffer from the popularity of sushi and start incurring losses. What will happen to the number of steakhouses in town in the long run? Explain your answer. c. Does the market for sushi restaurants fit the characteristics of perfect competition? Explain.
Expert Solution
The sushi restaurant will experience an increase in demand as consumers switch from grilled meat to raw fish. This demand increase will allow the sushi restaurant to raise its prices, and it will make an increased profit over the short-run, everything else held equal. In the long-run, entrepreneurs will see the profits commanded by the sushi restaurant and obtain the capital and resources to open their own competing sushi restaurants. As competition increases, the profits for all sushi firms will fall.
If there is an increased demand for sushi, there is a decreased demand for steak. Local steakhouses will be forced to cut prices and lay off workers in attempt to maintain profits. Some steakhouses will be unable to survive the lower prices perhaps because of their specific costs. Although the number of steakhouses decreases in the long-run, their remaining customers will switch to the steakhouses that stay in business, increasing those steakhouses' profits.
Generally, restaurants are not considered perfectly competitive because each restaurant offers a slightly unique menu. The sushi market is in this example is definitely not competitive because there is only one sushi firm at the beginning. This firm will be able to charge higher prices because it is able to act more like a monopolist.
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