Suppose that there are 1,000 hot pretzel stands in New York City. The market demand slopes downward, and the pretzel market is perfectly competitive (and starts in long-run equilibrium). Each stand has the same short-run cost curves, which are the typical shape for a perfectly competitive firm.
a. Draw the current (long-run) equilibrium for pretzels. Use two graphs, one for the entire market and one for a representative individual pretzel stand (show the long-run equilibrium using the short-run curves). Label the (long-run) equilibrium on each graph. The graph for the market should have 2 curves, the graph for the representative pretzel stand should have 5 curves.
b. If the total equilibrium quantity is 50,000 pretzels per day, then how many pretzels does each stand sell?
c. The city decides to restrict the number of stands to 800. How does this affect the pretzel market (price and quantity)?
d. Does this affect the individual stand’s price, quantity, cost, and profit? If so, how? If not, why not? Show on the graphs, and explain briefly. (Hint: You will not be able to give precise numerical answers; you can only say whether these things increase or decrease or do not change.)
e. The city now decides that it should charge a one-time flat fee for the 800 pretzel stand licenses. Explain how this affects the individual stand, and show using graphs.
f. Does the one-time fee affect the market supply or demand curves? Give a one-sentence explanation.