Answer to Question #52049 in Economics of Enterprise for lawrence

Question

If we assume that a given bus market is in perfect competition which charges a flat fare of $1 and if the formula for the total demand in the market is given by qd=250-60p where qd is the quantity demand at a given price. if we further assume constant returns to scale. (A)what is the total market demand at the $1 flat fare?
(B)if the market is shared by 4 firms what is the number of passengers carried by each company
(C)if the cost per kilometre is $1.60, average utilisation 20 passengers per vehicle kilometre and average trip distance 10 kilometre
1 what is the level of bus kilometres required to service this market
2 what profits are being made
3 what type of profit is this normal or abnormal
4 what is the cost per passenger carried(as opposed to the cost per vehicle kilometre)
(D) as this perfect competition, new firms may enter the market and compete this profits away . What price therefore will ensure that only normal profits are made
(E) the answer to part D should be the same as answer to C why

Answer 1

P = N$1, Qd = 250-60P
a) The total demand at the N$1 flat fare is: Qd = 250 - 60*1 = 190 thousands.
b) If the market is shared equally by 4 firms, the number of passengers per vehicle carried by each company is Q = 190/4 = 47.5 thousands.
c) If the cost per vehicle kilometer is N$1.60, average utilization 20 passengers per vehicle kilometer and average trip distance 10 kilometers:
i) the level of bus kilometers required to service this market is 190/20*10 = 85 thousands km.
ii) the profits are TP = TR - TC = 1*190 - 1.6*85 = N$54 thousands.
iii) the profit of N$54 thousands is abnormal.
iv) the cost per passenger carried (as opposed to the cost per vehicle kilometer) is ATC = 136/190 = N$0.72.