1. Tom Clancy is a taxi cab driver who drives people from Bozeman to the airport
ID: 1116070 • Letter: 1
Question
1. Tom Clancy is a taxi cab driver who drives people from Bozeman to the airport. He is a profit maximizing, price-taker. The market price for a taxi cab ride is $40. His costs are given by C 1Q, 20Q + 100, where Q represents the number of rides (a) How many taxi rides will he provide and what are his profits? (b) Assume the city now requires a $100 per year license for all taxi cab drivers. Assume the market price (here, the price paid by buyers of the service) remains at $40. How many rides does Tom provide? What are his profits? (c) Suppose the license was instead $1000 per year. Again, assume the market price (here, the price paid by buyers of the service) remains at $40. How many rides does Tom provide? What are his profits? (d) Suppose instead the city requires all drivers to pay a $10 fee for each ride. Assume the market price (here, the price paid by buyers of the service) remains at $40. How many rides does Tom provide? What are his profits? (e) How many rides does Tom provide and what are his profits if the city requires a $100 per year license for all taxi drivers as in part b, but we no longer assume that price remains at $40, and instead assume that all these are true: 1. There are a fixed number of taxi drivers, all identical to Tom 2. Each firm's demand for rides to the airport is perfectly inelastic and equal to the quantity per driver you found in part a (f) How many rides does Tom provide and what are his profits if the city requires a $10 fee per ride for all taxi drivers as in part d, but we no longer assume that price remains at $40, and assume that all these are true: 1. There are a fixed number of taxi drivers, all identical to Tom 2. Each firm's demand for taxi rides is perfectly inelastic and equal to the quantity per per driver you found in part a.Explanation / Answer
(c)
C = .1Q2+20Q+100
The rides will be such that P= MC
MC = dC/dQ = 0.2 Q +20
40 = 0.2Q+20
0.2Q = 20
Q = 20/0.2
Q = 100
Profit = TR –TC
TR = 100*40 = 4000
TC = 0.1*(100)^2+20*100+100+1000 = 4100
Profit = 4000-4100 = -100
Loss of $100
d)
The new Cost = 0.1Q^2+20Q+100+10*Q
Total Cost=0.1Q2+30Q+100
MC = 0.2Q +30
P = $40
AT new equilibrium:
40 = 0.2Q+30
Q = 10/.2 = 50
TR = 50*40 = 2000
TC = 0.1*(2500)+30*50+100 = 1850
Profit = TR-TC
= 2000-1850 = $150
Please provide information on (a) and (b) to be able to solve other parts.
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