2011HWS2 - Economics 104B Solution for Problem Set#2 Spring...

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Economics 104B Solution for Problem Set #2 Spring 2011 1. Assume that the taxi industry in New York city is competitive. Also assume that the marginal cost of a taxi ride is constant and equal to $5 per trip and that each taxi is capable of making 20 trips a day. Let the demand function for taxi rides each day be D ( p ) = 1100 - 20 p . a. Find the daily competitive equilibrium price of a taxi ride. Answer: Notice (i) entry or exit is free; (ii) marginal cost and average cost are the same; and (iii) all taxis are identical. We have in competitive equilibrium, price p * = MC = $5. b. How many rides will the citizens of New York make each day? Answer: Price p * found in part (a) together with the demand function, Q * = D ( p * ) = 1100 - 20 p * = 1000 is the total number of rides in equilibrium. So, the number of rides that citizens of New York City will make each day is 1000. c. How many taxis will operate in New York? Answer: Since taxis are identical and each taxi can make 20 trips a day, 1 the number of taxis is given by 1000 / 20 = 50 . d. Suppose now that every taxi operating in New York is required to have a special license and the number of such licenses is equal to the number of taxis you calculated in part c. Suppose further that the demand for taxi rides has increased to D ( p ) = 1200 - p . Calculate the new competitive equilibrium price and the daily profit of each taxi.
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