Question

. During the Enlightenment, the City of Calgary had a more-or-less free market in taxi services. Any respectable firm could provide taxi service as long as the drivers and cabs satisfied certain safety standards. Let us suppose that the constant marginal cost per trip of a taxi ride is $5 and that the average taxi has a capacity of 20 trips per day. Let the demand function for taxi rides be given by D(p) = 1100 − 20p, where demand is measured in rides per day, and price is measured in dollars. Assume that the industry is perfectly competitive. (a) What is the competitive equilibrium price per ride? What is the equilibrium number of rides per day? What is the minimum number of taxi cabs in equilibrium? (b) During the Calgary Stampede (The Greatest Outdoor Show on Earth), the influx of tourists raises the demand for taxi rides to D(p) = 1500 − 20p. Find the following magnitudes, based on the assumption that for these 10 days in July, the number of taxicabs is fixed and equal to the minimum number found in part (a): equilibrium price; equilibrium number of rides per day; profit per cab. (c) Now suppose that the change in demand for taxicabs in part (b) is permanent. Find the equilibrium price, equilibrium number of rides per day, and profit per cab per day. How many taxi cabs will be operated in equilibrium? Compare and contrast this equilibrium with that of part (b). Explain any differences. (d) With care and precision on one diagram, graph the three different competitive equilibria found in parts (a) through (c). In each case identify the supply curve, the demand curve, and the equilibrium price and quantity.

Answer 1

In perfectly competitive market, price=Mc=$5

Then demand=1100-20(5)=1000

Since each taxi has maximum capacity of 20, thus minimum number of taxi=1000/20=50.

Now demand increases. D(p)=1500-20p

Simce taxi is fixed with the capacity. Thus maximum number of supply=1000

Then 1) price=(1500-1000)/20=500/20=25, equilibrium quantity=1000,profit of cab per day=25-5*20=400

If this change ia permanent, there will be entry of new firms and finally price=5

Equilibrium price=5 and demand=500 thus no of firms=500/20=25