Food Trucks in the Short Run and the Long Run

Doug McKee, Cornell University, George Orlov, Cornell University
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Summary

Teams forecast the profitability of a food truck business in the long run, ideally taking into account the roles of their cost structure, potential market entry, and regulation.

Context for Use

This activity would work well as in an introductory micro course to integrate previous lecture material on short and long run costs, entry and exit, and regulation. It would also work well as a "kick-off" activity in an intermediate micro course before formal introduction of the short and long run. The activity provides students a rich example that they can think about as they build formal models that incorporate with these ideas. We expect teams will spend no more than 10 minutes on the activity, and the follow-up discussion should take about 10 additional minutes.

Overview

Teams will put themselves into the role of a food truck entrepreneur operating near a college campus. They will consider their optimal choices in the short run and long run as well as the potential differences in the business environment in the short and long run.

Students will ideally recognize that in the long run firms have more flexibility in choosing their inputs, but also may face added competition from new entrants to the market. This is also an opportunity to discuss the role of regulation and how all of these factors affect profitability of firms.

Expected Student Learning Outcomes

  • Recognize the relationship between short run and long run costs.
  • Recognize the impact entry and exit of competing firms on a firm's profit.
  • Think broadly about the impact of regulation on a market.

Information Given to Students

Sal is an entrepreneur who owns a food truck and sells vegan hamburgers on a local college campus. Her business is small but moderately profitable. She has recently learned that there will be a big increase in the number of students arriving on campus in a few weeks for the fall semester. In the short run, Sal only has time to hire another worker or two to help with the likely increase in demand for her hamburgers. If she accurately forecasts demand, her profit should increase.
What do you think will happen in the long run?

A) Her profit will increase (relative to her short run profit).
B) Her profit will stay the same.
C) She will break even (i.e., earn zero profit).
D) She will lose money.

Be prepared to defend your answer.


Student Handout for Food Trucks Assignment (Microsoft Word 2007 (.docx) 13kB Aug22 19)

Teaching Notes and Tips

To give students a richer context, the following two articles could be assigned before class:

There are three important factors that students should be thinking about: First, they should realize that in the long run Sal will be able to optimally choose all of her inputs. In this context, that could mean buying another truck, expanding her current truck, or even expanding her menu. This greater flexibility should allow her to increase her profit. On the other hand, she will likely face more competitors in the long run as other vendors enter the market. This will eventually drive profits to zero.

Some instructors may want to stop the discussion there as the traditional treatment of short and long run costs primarily considers the cost structure and entry/exit of firms. However, food truck markets are often highly regulated, and some students may raise this issue. In this scenario, it is possible that laws will be passed protecting local restaurants and this will force Sal to eventually lose money and exit the market. George Will describes this kind of regulation in his article about food trucks in Chicago. On the other hand, it is possible the government could restrict the number of food trucks and give a profitable advantage to early entrants like Sal.

By the end of the discussion, the instructor should make sure students understand the major determinants of short run versus long run profits.

Assessment

  • In the long run, firms have less, more, or the same flexibility in choosing their inputs?
  • In a perfectly competitive environment, firms will make positive, zero, negative, or indeterminate profit in the long run?