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intmicro_problemset_3_solutions

intmicro_problemset_3_solutions - cabs fulfills the demand...

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Question 4 Long-Run Equilibrium in Competitive Markets Consider a city with no restrictions on the number of taxi cabs that can operate in it. Each cab has an average cost for rides of: AC = 100 q + 0 . 01 q and a marginal cost of: MC = 0 . 02 q where q is the number of rides per day. The demand for taxi rides per day in the city is: D ( p ) = 10 , 000 - 100 p What is the long-run equilibrium number of cab rides and the number of cabs that will operate in this city? Answer: Because there are no barriers to entry for cab drivers, they will enter the market until price is driven the lowest point possible at which profits are 0 and the number of
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Unformatted text preview: cabs fulfills the demand for rides at that price. Competition drives down the price to the minimum point on the average cost curve (this part is the key to the answer to this question because it’s long run). This can be found by setting AC=MC: 100 q + 0 . 01 q = 0 . 02 q ⇒ q = 100 Plugging this value back into the average cost curve, we find that the equilibrium price must be: p = 100 100 + 0 . 01(100) = 2 At this price, the total demand for cab rides each day will be: D (2) = 10 , 000-100(2) = 9 , 800 Therefore, the equilibrium number of cabs will be: 9 , 800 100 = 98. 1...
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