ECONO MICS
a) Firms choose the optimal number of rides provided according to the marginal output rule: MR = MC. In a competitive market, MR = p, which means that p = MC = $5 Since we know the equilibrium price, we can substitute in the demand function to find the equilibrium number of rides per day: D(5) = 1,100 − 20 · 5 = 1,000 rides per day. Each taxicab has a capacity of 20 rides per day, which means that there will be 1,000/20 = 50 taxicabs in equilibrium.
b)The fact that no new licenses are issued means that the quantity supplied stayed at the same level as before, 1,000 rides per day. The new equilibrium price can be derived from the new demand equation: 1,000 = 1,500 − 20p p = $25 Equilibrium number of rides per day = 1000 Profit per cab = (25 - 5)20 = $400
c) If the change in demand is permanent , then again each taxi cab will behave competitively . Firms choose the optimal number of rides provided according to the marginal output rule: MR = MC. In a competitive market, MR = p, which means that p = MC = $5 Since we know the equilibrium price, we can substitute in the demand function to find the equilibrium number of rides per day: D(5) = 1,500 − 20 · 5 = 1,400 rides per day. Each taxicab has a capacity of 20 rides per day, which means that there will be 1,400/20 = 570 taxicabs in equilibrium. The difference between b) and c) part is that in part b) entries are restricted so it gives cab owners some degree of market power which enable them to charge a price greater than MC . But when in part C) ,the change in demand got permanent , then again each taxi cab started behaving competitively.
b)The fact that no new licenses are issued means that the quantity supplied stayed at the same level as before, 1,000 rides per day. The new equilibrium price can be derived from the new demand equation: 1,000 = 1,500 − 20p p = $25 Equilibrium number of rides per day = 1000 Profit per cab = (25 - 5)20 = $400
c) If the change in demand is permanent , then again each taxi cab will behave competitively . Firms choose the optimal number of rides provided according to the marginal output rule: MR = MC. In a competitive market, MR = p, which means that p = MC = $5 Since we know the equilibrium price, we can substitute in the demand function to find the equilibrium number of rides per day: D(5) = 1,500 − 20 · 5 = 1,400 rides per day. Each taxicab has a capacity of 20 rides per day, which means that there will be 1,400/20 = 570 taxicabs in equilibrium. The difference between b) and c) part is that in part b) entries are restricted so it gives cab owners some degree of market power which enable them to charge a price greater than MC . But when in part C) ,the change in demand got permanent , then again each taxi cab started behaving competitively.