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)**
.

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 _______ (

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).

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