In Venice, Italy fifty souvenir stores sell plastic toy gondola boats. Each store has a total cost of TCSR(q) = 0.1q^2 + 2q + 200. In the shortrun,

80% of the fixed cost is sunk. The demand for plastic gondolas is Q^D = 3,000 - 100P.

a) Find the supply function of the typical souvenir store. Keep in mind that when the price is below the shut down price firms supply a

quantity equal to zero.

b) Now, sum across firms to find the expression of the market supply of plastic gondolas in Venice.

c) What are the short run equilibrium price and equilibrium quantity of plastic gondolas?

d) Draw a diagram measuring the total number of plastic gondolas along the horizontal axis and the unit price of plastic gondolas along the

vertical axis and illustrate the market equilibrium.

e) How would you describe the concept of "consumer surplus"? What about the concept of "producer surplus"? How do these concepts

come handy when analyzing the economic effects of public policy?

Suppose the City of Venice imposes a $1 per unit tax on plastic gondolas. The tax is imposed on stores (sellers tax).

f) How does this tax affect the MC of the typical souvenir store? How does it affect the market supply of plastic gondolas?

g) After the tax is introduced, what happens to the price of plastic gondolas? What happens to the number of plastic gondolas sold?

h) In the short run, does the tax hurt the profits of the typical souvenir store? By how much?

Suppose the City of Venice opts for a licensing fee instead.

i) Does a licensing fee affect the short run market supply? In the short run, does it affect the equilibrium price and/or the equilibrium quantity

of plastic gondolas?

j) What is the economic incidence of the licensing fee in the short run?

k) Contrast and compare the long run effects of the unit tax and the licensing fee.