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Problem 3. Fred's Fine Fried Dough, a successful New Orleans franchise chain, has expanded into upstate New York State. Each franchisee pays Fred a fixed
Problem 3. Fred's Fine Fried Dough, a successful New Orleans franchise chain, has expanded into upstate New York State. Each franchisee pays Fred a fixed annual fee for the right to be a Fred's location, and otherwise controls all other aspects of the business. Each location has a total cost function for dough that has strictly increasing marginal cost. (For simplicity you may assume that all factors of production are variable, and that the franchise fee is refunded if the franchisee elects not to operate a restaurant. Also, since there are no dataumbers provided, there is a limit to how specific an answer you can give. Keep it simple and diagrammatic.) (3.1) Draw total, marginal and average cost functions that might describe a Fred's location. (3.2) Assume customers view the many Fred's locations as identical, and the fran- chises are perfect competitors in the fried dough market. Draw an individual franchise's supply curve. (3.3) The 37 Fred's locations in upstate New York all have the same costs. Draw the market supply curve for fried dough. (3.4) Being one of the 37 Fred's franchises has turned out to be very profitable. Along with your market supply curve, draw a market demand curve consis- tent with such profitability. What is the fried dough price? (3.5) How many of the 37 locations operate in equilibrium? (3.6) How much does each location produce? (3.7) Fred does not plan to change the franchise fee for next year, but does intend to let anyone who wants to pay the fee and open a Fred's franchise in upstate New York. Comparing this year with next year, what will happen to the number of franchises? (3.8) What do you think will happen to the profitability of a Fred's franchise? (3.9) What will happen to the price of Fred's fried dough? (3.10) What will happen to the output of a Fred's location
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