Suppose there are 1,000 hot pretzel stands operating in New York City. Each stand has the usual U-shaped average-total-cost curve. The market demand curve for pretzels slopes downward and the market for pretzels is in long-run competitive equilibrium.1. Draw the current equilibrium, using graphs for the entire market and for an individual pretzel stand. Now the city decides to restrict the number of pretzel-stand licenses, reducing the number of stands to only 800. 2. What effect will this action have on the market and on an individual stand that is still operating? Use graphs to illustrate your answer. Suppose that the city decides to charge a license fee for the 800 licenses.
3. How will this affect the number of pretzels sold by an individual stand, and the stand’s profit? The city wants to raise as much revenue as possible and also wants to ensure that 800 pretzel stands remain in the city. By how much should the city increase the license fee? Show the answer on your graph.