Answer Happy

4. (30pt) Monopolistic Competition. Huston, TX has a booming food truck scene. Each truck enjoys some degree of market power, due to differentiated varieties of food and different geographical loca- tions of the trucks. Each truck operates with a fixed cost F and a constant marginal cost o per meal. There is free entry and we will assume that trucks are homogeneous, they face the same demand and cost structure. The demand faced by each truck is induced by the equation Q=S => [: -6(P-P)] where Q is the quantity sold by this truck, S is the overall size of the market, n is the total number of trucks in business, P is the price charged by this truck, and P is the average price of food truck meals across the entire market. Due to the end of working-from-home policies at several major companies, the demand for food truck meals higher, the overall size of the market increases. a) (20pt) Use a diagram to illustrate the determination of the price per meal charged in equilibrium and the number of trucks that operate. Then, use it to study the consequences of this increase in demand-wide demand. Label curves and axes. b) (10pt) Discuss the welfare consequences of the increase in demand. (Focus on the market partici- pants who were already active in the market prior to the shock.)