Suppose anyone with a driver\'s license is capable of supplying only one trip fr
ID: 1194403 • Letter: S
Question
Suppose anyone with a driver's license is capable of supplying only one trip from the airport to the downtown business center on any given day. The long-run supply curve of such trips is horizontal at p = $40, which is the average cost of such trips. Suppose daily demand is Q = 1000 - 10p. Calculate the change in consumer surplus, producer surplus and social welfare if the city government requires those people supplying such trips to possess a special license, and the government will issue only 200 licenses.
Explanation / Answer
Since there are no restrictions on market entry, P = $40. Q = 1000 – 10 × 40 = 600. Producer Surplus = $0
Consumer Surplus is the area under the demand curve and above the price. The area of that triangle is ½ × Q × (P0 – P) = ½ × 600 × (100 – 40) = $18000.
If only 200 (200 licenses limit) trips can be made, the price solves:
200 = 1000 – 10 × P,
so P = $80.
Producer Surplus is (P – MC ) × Q = (80 – 40) × 200 = $8,000.
Consumer Surplus is ½ × 200 × 20 = $2000. Social Welfare = $10,000.