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.

Step by step solution

01

a.1- Short-run profit of the sushi restaurant

As the demand for sushi increases due to the health report, more people will visit the sushi restaurant. This increase in demand will lead to higher prices and more consumption of sushi, resulting in a higher short-run profit for the sushi restaurant.

02

a.2- Number of sushi restaurants in the long run

As the first sushi restaurant becomes successful, higher profits will attract more entrepreneurs to open sushi restaurants in town. In the long run, the number of sushi restaurants will increase to meet the demand. This is a process known as market entry.

03

a.3- Sustainability of short-run profit in the long run

In the long run, as more sushi restaurants open in town, competition among them will increase. The increased competition will lead to a decrease in sushi prices, driving short-run profits down. Eventually, the market will reach a long-run equilibrium with normal profit levels, meaning the first sushi restaurant will likely not be able to sustain its initial high short-run profit in the long run.

04

b- Impact on steakhouses in the long run

As people shift their preferences towards sushi, the demand for grilled meat at local steakhouses will decrease. The lower demand results in lower revenues and profits for steakhouses. In the long run, some steakhouses may incur losses and be forced to shut down their businesses. This reduction in the number of steakhouses is a process known as market exit. This will continue until the remaining steakhouses can earn a normal profit by serving the reduced demand for grilled meat.

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