Economics Problems

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Assignment 1
This assignment is a compulsory assessment task. Value: Due: 15% of final mark 12.00pm (midday) on the scheduled teaching day of Week 5 Topic: Marking criteria: Assessment 1 See guides to Assessments

Imagine a country where long distance bus and taxi services are both provided by private interests, and, from a consumer perspective these services are viewed as substitutes. The demand for bus services is:

Where D1 is annual demand for bus services, P1 is price of bus trips, P2 is price of taxi trips and Y is annual income. Assume the supply of bus trips by the bus industry can be described by:

Where S1 is bus services in trips per year and the market clears so:

Assume income, Y, is $75,000 and the price of taxi trips is P2 = $2000. Further, assume the market always clears, there are no empty buses or theft of rides and both consumers and producers

Teaching Period 1, 2011


are competitive. Ignore externalities such as congestion, antisocial behaviour and pollution.

Answer the following questions:

Part 1
1. What is the equilibrium price of bus services? 2. How many bus services are provided? 3. Calculate the industry profits (producer surplus) for bus service providers.

Part 2
Assume the government puts $150/trip tax on producers. Answer the following questions: 1. 2. 3. 4. What is new equilibrium price of bus trips to consumers? What is the new equilibrium price to producers? How many bus services sold? How much tax revenue is raised?

Part 3
A large corporation who can dominate the market starts to provide bus services. Their supply curve (actually called their marginal cost curve) for bus trips is:

1. What price will bus services now trade at with the new supplier in the market? 2. What quantity of bus trips will now be produced? 3. How many trips will now be provided by the bus firms operating before the large...
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