Numerous "hookah bars," at which patrons can pay to utilize water pipes to smoke regular and flavored tobaccos, have popped up around the nation. Hookah bars are particularly popular with college students.
a. Suppose that the market for the services of hookah bars is in long-run equilibrium. Then two events occur: (1) more cities end regulations that had generated fixed costs for hookah bars, and (2) many nonstudent adults discover previously unknown preferences for the services of hookah bars. Use diagrams to trace through the short-run effects on the market price of hookah-bar services, the marginal revenue and marginal cost of these services at a typical hookah-bar, and the equilibrium quantity of services provided both by a typical hookah bar and by the hookah-bar industry.
b. Redraw your diagrams showing the situation at the conclusion of your answer to part (a). Use these new diagrams to explain the long-run adjustments that will take place in this industry.