Question

Authentic Car Services’ labor force includes drivers and dispatchers, and all report to work if the firm is providing service. Firm’s additional costs can be described by the equations: MC = 2 + 0.01Q and AVC = 2 + 0.005Q, where Q is the number of trips per week.

Now consider that consumers’ income increases, and transportation services is a normal good. As a result, the new market demand for transportation services is described by one of the following equation sets:

Equation A: P = 7 – 0.015Q, and MR = 7 – 0.03Q

Equation B: P = 10 – 0.015Q and MR = 10 – 0.03Q

The market fully adjusts after the demand shock.

4. As a result of the shock, the new market demand is described by Equation ____ (A | B) .  Authentic Car Services now provides ______ trips per week and charges $_____ for each trip.

5. As a result of the shock, consumers’ surplus has decreased. Now, Authentic Car Services has _________ (a higher | a lower | no change in its) economic profit, and the overall market _______ (efficiency | efficiency or inefficiency | inefficiency) has _________ (decreased to | increased to | remains the same at ) $.___________.

Answer 1

4. As a result of the shock, the new market demand curve is described by equation B because, an increase in income is the positive shock that will result in higher prices in the market. Authentic car services now provides 100 trips per week and charges $ 7 for each trip. (The solution is given below)

MR = MC

10 - 0.03Q = 2 + 0.01Q

10 - 2 = 0.01Q + 0.03Q

8 = 0.04Q

Q = 200

Put this value of Q in equation of price

P = 10 - 0.015 Q

P = 10 - 0.015 (200)

P = 10 - 3

P = 7

Answer 5.

As a result of the shock, the consumer surplus has decreased. Now, authentic car services has a higher economic profit because lower consumer surplus leads to an increase in producer surplus. And, the overall market efficiency has increased to $ 1400 ( TR = P*Q, 200*7).