Question

Suppose in Karachi the first sushi restaurant opens in town. Initially, people hesitates and are
extremely cautious to try a raw fish, as in our town people loves chicken, mutton and meat.
In which, grilled meat in different forms of food have always been popular. Soon, however,
WHO - health report warns people against grilled meat and suggests to increase their
consumption of fish, especially raw fish. Slowly and gradually, the new start up business of
sushi becomes very popular and its profit increases.
a. What will happen to the short-run profit of the sushi restaurant?
b. What will happen to the number of sushi restaurants in town in the long run?
c. Will the first sushi restaurant be able to sustain its short-run profit over the long run?
Explain your answers.
d. 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.

Answer 1

In Karachi, people love to eat chicken, mutton, and meat due to which people hesitate to try the raw fish that is offered by the first sushi restaurant. However, the WHO-health report warns against grilled meat and emphasizes the consumption of raw fish. Therefore,

1. In the short-run, the consumption of raw fish increases after the WHO-health report. As a result, the profit of the sushi restaurant will increase in the short-run due to sudden or uncertain shifts in the demand of the people for the raw fish.
2. In the long-run, the economic profit from the sale of raw fish encourages new firms to enter the market of raw fish. As a result, the number of sushi restaurants will increase in town in the long-run.
3. An increased number of firms will increase the competition in the market due to which firms are not able to set their prices and have to charge a price equal to marginal cost. The first sushi restaurant has the first-mover advantage due to which it is capable enough to set a little higher price in the market, but that will not be the same as the price in the short-run. Therefore, the first sushi restaurant cannot sustain its short-run profit in the long run due to high competition but can enjoy some level of economic profit in the long-run.
4. Local steakhouses are the places for meat lovers. Due to the WHO-health report, people shifted their interest from chicken/meat to raw fish, and that, in turn, lower the profit of Steakhouses in the short-run. Due to decreased demand in the long-run, local steakhouses suffer from losses due to which firms start exiting the market due to losses, and no firm wants to enter the market due to reduced demand. As a result, the number of steakhouses will decrease in the long-run.