At Dulles airport, only taxis and privately owned cars are allowed to use the hi

Question

At Dulles airport, only taxis and privately owned cars are allowed to use the highway between downtown and the airport. That taxi market is competitive. There is a special lane for taxis so they are always able to travel at 55mph. The demand for taxi rides depends on the taxi fare (P), the average speed of a private car on the highway (E), and the price of gas (G). The number of fares supplied by taxis will depend on the taxi fare and the price of gas.

A) Suppose P,E and G change. How would you expect each to impact the demand for taxis?

B) Suppose Qd = 1000 + 50G - 4E - 400P and Qs=200 - 30G + 100P. Find the equilibrium taxi fare. Assume G=2.5 and E=50.

C) Suppose UBER drivers start servicing riders to and from Dulles. What would you expect to happen to your answers from part C?

Explanation / Answer

(A) Increase (decrease) in taxi fare will decrease (increase) the demand for taxis, but will not impact demand by a large amount, since other modes of public transport are not available, so commuters have to use either taxi or private cares. Demand is inelastic.

Increase (decrease) in speed of private cars will decrease (increase) the demand for taxis, since these are substitutes.

Increase (decrease) in gas price will increase (decrease) the cost of private cars, so demand for taxis will increase (decrease).

(B)

Qd = 1000 + 50G - 4E - 400P

= 1000 + (50 x 2.5) - (4 x 50) - 400P = 925 - 400P

Qs = 200 - 30G + 100P

= 200 - (30 x 2.5) + 100P

= 125 + 100P

Equating Qd with Qs:

925 - 400P = 125 + 100P

500P = 800

P = 1.6

Q = 125 + (100 x 1.6) = 285

(C)

Answers from which part you want re-evaluated: Part (B) or Part (A)?

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.