During the Enlightenment, the City of Calgary had a more-or-less free market in
taxi services. Any respectable �rm could provide taxi service as long as the drivers and cabs
satis�ed certain safety standards. Let us suppose that the constant marginal cost per trip of
a taxi ride is $5 and that the average taxi has a capacity of 20 trips per day. Let the demand
function for taxi rides be given by D(p) = 110020p, where demand is measured in rides per
day, and price is measured in dollars. Assume that the industry is perfectly competitive.
a. What is the competitive equilibrium price per ride? What is the equilibrium
number of rides per day? What is the minimum number of taxi cabs in equilibrium?
b. During the Calgary Stampede (big outdoor show), the in
ux of tourists raises
the demand for taxi rides to D(p) = 1500 20p. Find the following magnitudes, based
on the assumption that for these 10 days in July, the number of taxicabs is �xed and
equal to the minimum number found in part (a): equilibrium price; equilibrium number
of rides per day; pro�t per cab.
c. Now suppose that the change in demand for taxicabs in part (b) is permanent.
Find the equilibrium price, equilibrium number of rides per day, and pro�t per cab per
day, How many taxi cabs will be operated in equilibrium? Compare and contrast this
equilibrium with that of part (b). Explain any di�erences.
d. With care and precision on one diagram, graph the three di�erent competitive
equilibria found in part (a) through (c). In each case identify the supply curve, the
demand curve, and the equilibrium price and quantity.
1 answer