Problem 5. Assume that the taxi industry in Stony Brook is perfectly competitive

Question

Problem 5. Assume that the taxi industry in Stony Brook is perfectly competitive. Also, assume that the constant marginal cost of a taxi ride is 58 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) = 1, 100-20P a. What is the perfectly competitive price of a taxi ride? b. How many rides will be made every day? e ow maytais wll i o Brook? Assume that every taxi that operates in Stony Brook has a special license. Therefore, the number of such licenses is the same as the number of taxis that you calculated in part c. of this problem. Further, assume that the demand for taxi rides has increased and is now D(p) = 1, 200-20P. The cost of operating a taxi d. Calculate the price that will equate demand with supply e. Calculate the profit that each taxi will earn per day. (Each taxi operates at its full capacity.)

Explanation / Answer

a) Under perfect competition, price is equal to MC i.e. price of a taxi ride is equal to $ 5.

b) Under perfect competition, equilibrium is where P = MC

(1100 - Q)/20 = 5

1100 - Q = 100

Q = 1000 rides per day

c) No. of taxis operate in Stony Brook = 1000/20 = 50 taxis

d) Demand = Supply

1200 - 20P = 50

20P = 1150

P = 1150/20 = 57.5

e) Profit = TR - TC = PxQ - 5Q = 57.5 x 50 - 5 x 50 = $ 2625

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