The international airport in Brezuela, a vibrant city in the country of Bonitas,

Question

The international airport in Brezuela, a vibrant city in the country of Bonitas, auctions an exclusive license every year to a taxi company for the right to serve the airport's passengers. Victor Diego is the owner of Speedy Motors, the taxi company that won this year's license. Currently, with average revenue at $2 per mile, Speedy Motors earns marginal revenue of $1 per mile. Since there are no other taxis available at the airport, Victor feels that they can increase profits by increasing fares. However, his daughter, Lola Diego, a student of economics, disagrees with him and says that a hike in fares will decrease profits Which of the following, if true, would strengthen Lola's argument? O A. The current fare that Speedy Motors charges is higher than what taxi services in the city charge O B. Speedy Motors currently operates at the point where the marginal cost incurred per mile is equal to the marginal revenue eamed per mile. O C. The demand for taxis at the Brezuela airport is consistently high throughout the day D. Feedback surveys at the airport show that consumers prefer taking taxis to riding buses because they are faster E. Speedy Motors operates similar airport taxi services in other cities as well. O

Explanation / Answer

If a company is producing a level of output corresponding to which marginal cost equals marginal revenue then such level of output is termed as profit-maximizing level of output.

The price corresponding to such output is referred to as profit-maximizing price.

A firm maximizes its profit at this price.

Any change of price from profit-maximizing level leads to inequality of MR and MC and thus results in a decrease in profits.

So, it Speedy Motors currently operates at the point where the marginal cost incurred per mile is equal to the marginal revenue per mile then in such case profit of the firm is at its maximum.

Any change in price in such case would only lead to decrease in profit as profit-maximizing equation will get impacted in adverse manner.

Thus, if above stated assertion is true then it will strengthen the Lola's argument.

The correct answer is the option (B).

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