Question

The demand function for local bus service (measured in rides per day) is given by r = 5000-1000pr and the current price per ride is $1. The bus company has applied to the local public service commission for a rate increase. A citizens’ committee disagree and assert that the price should be lowered to attract more rides and thus increase revenues. Ascertain which side is correct and why? b. Show that at the maximum of the average product (AP) of labour, AP of labour is equal to the marginal product (MP) of labour. c. Show that average cost (AC) is equal to the marginal cost (MC) at the minimum of AC. d. Derive the relationship between marginal revenue and the price elasticity of demand. e. Show using (d) that for the perfectly competitive markets the mark-up is zero.

Answer 1