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Question 3: Suppose there are 1000 hot-pretzel stands operating in Toronto. Each stand has the usual U-shaped average-total-cost curve. The market demand curve for pretzels

Question 3: Suppose there are 1000 hot-pretzel stands operating in Toronto. 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.

a) Draw the current equilibrium, using graphs for the entire market and for an individual pretzel stand.

b) Now the city decides to restrict the number of pretzel-stand licences, reducing the number of stands to only 800. What effect will this action have on the market and on an individual stand that is still operating? Use graphs to illustrate your answer. (You can explain it on the graph in a) above)

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