Question

Imagine a country where plane and train services between two main cities are both completely provided by private companies, and, from a consumer perspective these services are perceived as substitutes. The demand for plane trips services is:

?1 = 3,000 − 200?1 + 30?2 + 2?

(1) Where D1 is annual demand for plane trips, P1 is price of plane trips, P2 is price of train trips and Y is average annual consumer income. Assume the supply of plane trips by the industry can be described by:

?1 = 300?1

(2) Where S1 is the number of plane trips, and the market clears so:

?1 = ?1

(3) Assume the average annual income, Y, is $80,000 and the price of train trips is P2 = $500. Further, assume the market always clears, there are no empty planes and trains, and producers are competitive. Ignore externalities such as pollution.

Answer the following questions:

Section A (20 Marks) 1. What is the equilibrium price of plane trips? (5 Marks)

2. How many plane trips are provided and purchased? (5 Marks)

3. Present the relevant diagram. (5 Marks)

4. Calculate the producer surplus for the airline companies. (5 Marks)

Section B (25 Marks)

Assume the government puts a $120 tax on each plane trip, which is levied on airline companies. Answer the following questions:

1. What is the new price of plane trips to consumers? (5 Marks)

2. What is the new price of plane trips to airline companies? (5 Marks)

3. How many plane trips are now supplied and bought? (5 Marks)

4. Present the relevant diagram. (5 Marks)

5. How much tax revenue is raised? (5 Marks)

Section C (25 Marks)

The government decided not to apply the tax, and a large airline company who can dominate the market starts to offer trips. Its supply curve (called marginal cost curve) for plane trips is different than the supply curve for the previous companies in the market:

?2 = 350 + 50?1 (4)

1. What will be the new price of plane trips with the new supplier in the market? (5 Marks)

2. How many plane trips will now be provided by the airline companies operating before the large company entered the market? (5 Marks)

3. How many plane trips will now be provided by the new large airline company? (5 Marks)

4. How many plane trips will now be produced in total? (5 Marks)

5. Present the relevant diagram (5 Marks)

Section D (20 Marks)

Explain how this type of market structure could affect the market performance. How would this affect the welfare of consumers?

Answer 1

classmate Date DI= 3000 - 2000, +30/2 +24 Page Si 300 Pi y = 80,000 2 P2 = suo geven ♡ Equilibrium price can be obtained where Di=Si Disi 3000-200 P1+30p2 + 2y. = 300p, 500 pl 3000 - 200 f1 + 301500) + 2/80,000) = 300P, 3000 + 15000 & 160,000 500p 1 178.000 P = 356 Cequilbrim bove (plane rips) = 300/356) - 106,800 106,800 plane bips were purchased and provided 2 Price -Supply plane hips) 2907 Equilibrium, 356 Demand T06,800 178,000 Q (plane hibs) S= 300p. Di= 178,000 - 200 R (4 Producer Surplus is area below price line and above supply cure which is equal to area of shaded region I X 106,800 × 356 2 1$ 19010 400 Scanned by TapScanner