Question

Suppose that there are 1,000 hot-pretzel stands operating in Toronto. Each stand has the usual U-shaped average total cost curve. Both the market demand curve and the supply curve for pretzels are linear, and the market for pretzels is in long-run competitive equilibrium.
a) Illustrate the current equilibrium in a two-part diagram with the entire market in one part and an individual pretzel stand in the other.
b) Now the city decides to restrict the number of pretzel-stand licences, reducing the number of stands to only 800. Show in a diagram what effect this action will have on the market and on an individual stand that is still operating.
c) Suppose that the city decides to impose an annual lump-sum licence fee on each of the 800 licence holders. Show in a diagram how this fee will affect the number of pretzels sold by an individual stand, and the stand's profit.