Consider the market for vanilla ice cream in St Andrews. Suppose that there are a number of firms supplying vanilla ice cream, and they all have

increasing marginal costs. [20%]

(a) Suppose that consumers and producers are price takers. Illustrate this market on a graph with price on the y-axis and quantity on the x-axis. Identify the equilibrium price and quantity. Identify consumer and producer surplus on your graph.

(b) Suppose that, with no change in equilibrium quantity traded, demand for vanilla ice cream in St Andrews becomes more inelastic. Illustrate this on your graph by drawing a new demand curve that passes through the old equilibrium point. Indicate clearly which is the original and which is the new demand curve. How do consumer and producer surplus compare to question (5a)?

(c) Imagine the demand is as described in (5a). Suppose now that St Andrews passes a law that forbids the sale of vanilla ice cream by any shop other than Jean's Ice Cream Parlour. How would you expect the price of vanilla ice cream in St Andrews to change? How about the quantity traded? Is this new equilibrium Pareto efficient? Why or why not.

(d) Draw a new graph to represent (5c): include an isoprofit curve for Jean's Ice Cream Parlour. Identify equilibrium price and quantity, and consumer and producer surplus: are these larger or smaller than in the equilibrium in (5a)?