Suppose anyone with a driver's license is capable of supplying 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 = $50, 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 300 licenses.
The competitive equilibrium is Q = 1000 - (10 ∗ 50 ) = 500. With the supply restriction of 300, price becomes $70. The loss in social welfare is [(70 - 50 ) ∗ (500 - 300 )]/2 = $2,000. Producers gain
(70 - 50 ) ∗ 300 = $6,000. Consumers lose $6,000 + $2,000 = $8,000.
You might also like to view...
Refer to Figure 6.2. The situation pictured is one of
A) constant returns to scale, because the line through the origin is linear. B) decreasing returns to scale, because the isoquants are convex. C) decreasing returns to scale, because doubling inputs results in less than double the amount of output. D) increasing returns to scale, because the isoquants are convex. E) increasing returns to scale, because doubling inputs results in more than double the amount of output.
In the United States, monopoly regulation began primarily because:
a. there were no natural monopolies in the real world. b. the government wanted to promote other forms of business practices. c. monopolies did not typically follow occupational and safety rules. d. monopolies tended to restrict output and raise prices. e. most economists believed that the majority of industries were following the purely competitive model.