Question

# Authentic Car Services’ labor force includes drivers and dispatchers, and all report to work if the...

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 ) \$.___________.

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

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).

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