Consider the market for carriage rides, which you can assume is a price-taker ma
ID: 1210354 • Letter: C
Question
Consider the market for carriage rides, which you can assume is a price-taker market. Suppose some carriage companies are discriminatory and hire only American citizens to drive their carriages, while other firms are nondiscriminatory—they don't care about the citizenship of the drivers they hire as long as they have a legal right to work in the United States. Assume for now that customers are nondiscriminatory—when they decide to take a carriage, they don't care about the citizenship status of the driver.
The marginal cost (MC), average variable cost (AVC), and average total cost (ATC) curves of the two types of firms are shown on the following graphs. Figure A shows the cost structure of a discriminatory firm; Figure B shows the cost structure of a nondiscriminatory firm. Because nondiscriminatory firms are able to hire from a larger pool of potential workers, they are able to provide the same services at a lower cost.
Suppose the price of a carriage ride is currently $0.50 per mile.
Complete the following table by indicating whether each type of firm will earn a positive profit, a zero profit, or a loss of profit in the short run. Then, determine whether the firm should operate in the short run, based on the answer you provided in the Profit or Loss column. Given the profit result at a price of $0.50 per mile, indicate if each type of firm will stay in business or exit in the long run.
Profit/Loss
Operate: Yes/No
Stay/Exist: Stay in Market/Exit the Business
Explanation / Answer
Since, it is a perfectly competitive market therefore profit maximization would occur at P=MC
Here, P = ¢50 per mile
In case of discriminatory firm.
When P = 50 cents per mile
Q = 18(hundreds of miles per day)
Here ATC > P therefore Discriminatory firm will make loss.
In short run discriminatory firm should operate because P>AVC.
In long run discriminatory firm should Exit.
In case of non discriminatory firm when P = 0.5 $ per mile
At this point ATC < P.
Hence non discriminatory firm makes profit.
Yes firm should operate in the short run.
In long run firm should continue that is stay in market.
Both discriminatory and nondiscriminatory firms may coexist in the market and earn zero profit.
(Explanation: When people are having preference for American drivers over other countries citizen then we are talking about two different markets. Hence in the long run both the firms would earn zero profit.)
Last question: True
Short run short run Long Run Profit or loss operate? Stay or exit Discriminatory Loss Yes Exit Non Discriminatory Profit Yes Stay