Assume that the market for rental cars (used for business purposes) is perfectly

Question

Assume that the market for rental cars (used for business purposes) is perfectly competitive with the demand for this capital input given by:
K=1 500-25v
And the supply given by:
K=75v-500
Where K represents the number of cars rented by firms and v is the rental cars rented by firms and v is the rental rate per day.
a. What will be the equilibrium levels for v and K in this market?
b. Suppose that following an oil embargo gas prices rise dramatically so that now business firms must take account of gas prices in their car rental decisions. Their demand for rental cars is now given by:
K=1 700-12v-300g
Where g is the per-gallon price of gasoline. What will be the equilibrium levels for v and K if g=$2? If g=$3?
c. Because the oil embargo brought about decreased demand for rental cars, what might be the implication for other capital input markets as a result? For example, employees may still need transportation, so how might the demand for mass transit be affected? Because business people also rent cars to attend meetings, what might happen in the market for phone equipment as employee drives less and uses the phone more? Can you think of any other factor input markets that might be affected?

Explanation / Answer

A. We find this by setting supply equal to demand and solving 1500-25v=75v-500 2000=100v v=20 Now we plug V into either supply or demand k=1500-25(20)=1000 B. Here we set our supply equal to our new demand at our new g=2 and g=3 for g=2 75v-500=1700-12v-300(2) 75v-500=1700-12v-600 87v=2800 v=2800/87 now plug V into equation 25(2800/87)-500=k k=70,000/87-43,500/87 k=26,500/87 For g=3 75v-500=1700-12v-300(3) 75v-500=1700-12v-900 87v=2500 v=2500/87 now plug V into equation 25(2500/87)-500=k k=62,500/87-43,500/87 k=1,9000/87 C. In this case, consumers will reduce their demand for rental cars due to the excesively high oil prices. Mass transit will be in high demand which will cause the local state government to raise prices of bus and train fares. In addition, the high oil prices will raise these prices as well. The demand will overwhelm the transit system and more labor will be demanded whcih will cause the wage rate to increase. With the decrease in rental cars demanded, devices such as in gps and phones will decrease because the will no longer be needed. Gas stations will be affected due to less cars being on the road. Toll booths will lose money for the same reason. Hope this helps

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