In a city with a medium-sized population, the equilibrium price for a city bus ticket is $1.00, and the number of riders each day is 10,800. The short-run price elasticity of demand is -0.60, and the short-run elasticity of supply is 1.0.
a. Estimate the short run linear supply and demand curves for bus tickets.
b. If the demand for bus tickets increased by 10% because of a rise in the world price of oil, what would be the new equilibrium price of bus tickets?
c. If the city council refused to let the bus company raise the price of bus tickets after the demand for tickets increases (see (b) above), what daily shortage of tickets would be created?
d. Would the bus company have an incentive to increase the supply in the long run given the city council's decision in (c) above? Explain your answer.

Question

Rakesh Kumar · Accepted Answer

Final Answer : Given:P *  = $1.00 per ticket Q *  = 10,800E d  = -0.60 E s  = 1.0a.Demand: Q d  = a 0  + a 1 P Supply: Q s  = b 0  + b 1 PUse: E =  *  = $1.00 per ticket Q *  = 10,800 E d  = -0.60 E s  = 1.0 a.Demand: Q d  = a 0  + a 1 P Supply: Q s  = b 0  + b 1 P Use: E =   ×   to compute a 1  and b 1 . E d  =   a 1  E s  =   b 1  -0.60 =   a 1  1.0 =   b 1  a 1  = -6,480 b 1  = 10,800              10,800 = a 0  - 6,480.00(1.0) 10,800 = b 0  + 10,800.00(1.0) a 0  = 17,280 b 0  = 0.0 Q d  = 17,280 - 6,480P Q s  = 0.0 + 10,800P b.New demand = (1.10)Q d  = (17,280 - 6,480P)(1.10) Q d ' = 19,008.00 - 7,128P Equate Q d ' to Q s  to get new equilibrium price.19,008 - 7,128P = 0.0 + 10,800 P P *  = $1.06 per ticket c.The shortage would be the quantity demanded at P = $1.00 minus the quantity supplied at P=$1.00. Q d  = 19,008 - 7,128($1.00) = 11,880 Q s  = 0.0 + 10,800($1.00) = 10,800 Shortage = 11,800 - 10,800 = 1,080 rides per day d.No. The bus company has no incentive to supply more than 10,800 rides per day, as long as the price is restricted at $1.00. class=answers-bank-image d-inline rel=preload > ×  *  = $1.00 per ticket Q *  = 10,800 E d  = -0.60 E s  = 1.0 a.Demand: Q d  = a 0  + a 1 P Supply: Q s  = b 0  + b 1 P Use: E =   ×   to compute a 1  and b 1 . E d  =   a 1  E s  =   b 1  -0.60 =   a 1  1.0 =   b 1  a 1  = -6,480 b 1  = 10,800              10,800 = a 0  - 6,480.00(1.0) 10,800 = b 0  + 10,800.00(1.0) a 0  = 17,280 b 0  = 0.0 Q d  = 17,280 - 6,480P Q s  = 0.0 + 10,800P b.New demand = (1.10)Q d  = (17,280 - 6,480P)(1.10) Q d ' = 19,008.00 - 7,128P Equate Q d ' to Q s  to get new equilibrium price.19,008 - 7,128P = 0.0 + 10,800 P P *  = $1.06 per ticket c.The shortage would be the quantity demanded at P = $1.00 minus the quantity supplied at P=$1.00. Q d  = 19,008 - 7,128($1.00) = 11,880 Q s  = 0.0 + 10,800($1.00) = 10,800 Shortage = 11,800 - 10,800 = 1,080 rides per day d.No. The bus company has no incentive to supply more than 10,800 rides per day, as long as the price is restricted at $1.00. class=answers-bank-image d-inline rel=preload > to compute a 1  and b 1 .E d  =  *  = $1.00 per ticket Q *  = 10,800 E d  = -0.60 E s  = 1.0 a.Demand: Q d  = a 0  + a 1 P Supply: Q s  = b 0  + b 1 P Use: E =   ×   to compute a 1  and b 1 . E d  =   a 1  E s  =   b 1  -0.60 =   a 1  1.0 =   b 1  a 1  = -6,480 b 1  = 10,800              10,800 = a 0  - 6,480.00(1.0) 10,800 = b 0  + 10,800.00(1.0) a 0  = 17,280 b 0  = 0.0 Q d  = 17,280 - 6,480P Q s  = 0.0 + 10,800P b.New demand = (1.10)Q d  = (17,280 - 6,480P)(1.10) Q d ' = 19,008.00 - 7,128P Equate Q d ' to Q s  to get new equilibrium price.19,008 - 7,128P = 0.0 + 10,800 P P *  = $1.06 per ticket c.The shortage would be the quantity demanded at P = $1.00 minus the quantity supplied at P=$1.00. Q d  = 19,008 - 7,128($1.00) = 11,880 Q s  = 0.0 + 10,800($1.00) = 10,800 Shortage = 11,800 - 10,800 = 1,080 rides per day d.No. The bus company has no incentive to supply more than 10,800 rides per day, as long as the price is restricted at $1.00. class=answers-bank-image d-inline rel=preload > a 1  E s  =  *  = $1.00 per ticket Q *  = 10,800 E d  = -0.60 E s  = 1.0 a.Demand: Q d  = a 0  + a 1 P Supply: Q s  = b 0  + b 1 P Use: E =   ×   to compute a 1  and b 1 . E d  =   a 1  E s  =   b 1  -0.60 =   a 1  1.0 =   b 1  a 1  = -6,480 b 1  = 10,800              10,800 = a 0  - 6,480.00(1.0) 10,800 = b 0  + 10,800.00(1.0) a 0  = 17,280 b 0  = 0.0 Q d  = 17,280 - 6,480P Q s  = 0.0 + 10,800P b.New demand = (1.10)Q d  = (17,280 - 6,480P)(1.10) Q d ' = 19,008.00 - 7,128P Equate Q d ' to Q s  to get new equilibrium price.19,008 - 7,128P = 0.0 + 10,800 P P *  = $1.06 per ticket c.The shortage would be the quantity demanded at P = $1.00 minus the quantity supplied at P=$1.00. Q d  = 19,008 - 7,128($1.00) = 11,880 Q s  = 0.0 + 10,800($1.00) = 10,800 Shortage = 11,800 - 10,800 = 1,080 rides per day d.No. The bus company has no incentive to supply more than 10,800 rides per day, as long as the price is restricted at $1.00. class=answers-bank-image d-inline rel=preload > b 1 -0.60 =  *  = $1.00 per ticket Q *  = 10,800 E d  = -0.60 E s  = 1.0 a.Demand: Q d  = a 0  + a 1 P Supply: Q s  = b 0  + b 1 P Use: E =   ×   to compute a 1  and b 1 . E d  =   a 1  E s  =   b 1  -0.60 =   a 1  1.0 =   b 1  a 1  = -6,480 b 1  = 10,800              10,800 = a 0  - 6,480.00(1.0) 10,800 = b 0  + 10,800.00(1.0) a 0  = 17,280 b 0  = 0.0 Q d  = 17,280 - 6,480P Q s  = 0.0 + 10,800P b.New demand = (1.10)Q d  = (17,280 - 6,480P)(1.10) Q d ' = 19,008.00 - 7,128P Equate Q d ' to Q s  to get new equilibrium price.19,008 - 7,128P = 0.0 + 10,800 P P *  = $1.06 per ticket c.The shortage would be the quantity demanded at P = $1.00 minus the quantity supplied at P=$1.00. Q d  = 19,008 - 7,128($1.00) = 11,880 Q s  = 0.0 + 10,800($1.00) = 10,800 Shortage = 11,800 - 10,800 = 1,080 rides per day d.No. The bus company has no incentive to supply more than 10,800 rides per day, as long as the price is restricted at $1.00. class=answers-bank-image d-inline rel=preload > a 1  1.0 =  *  = $1.00 per ticket Q *  = 10,800 E d  = -0.60 E s  = 1.0 a.Demand: Q d  = a 0  + a 1 P Supply: Q s  = b 0  + b 1 P Use: E =   ×   to compute a 1  and b 1 . E d  =   a 1  E s  =   b 1  -0.60 =   a 1  1.0 =   b 1  a 1  = -6,480 b 1  = 10,800              10,800 = a 0  - 6,480.00(1.0) 10,800 = b 0  + 10,800.00(1.0) a 0  = 17,280 b 0  = 0.0 Q d  = 17,280 - 6,480P Q s  = 0.0 + 10,800P b.New demand = (1.10)Q d  = (17,280 - 6,480P)(1.10) Q d ' = 19,008.00 - 7,128P Equate Q d ' to Q s  to get new equilibrium price.19,008 - 7,128P = 0.0 + 10,800 P P *  = $1.06 per ticket c.The shortage would be the quantity demanded at P = $1.00 minus the quantity supplied at P=$1.00. Q d  = 19,008 - 7,128($1.00) = 11,880 Q s  = 0.0 + 10,800($1.00) = 10,800 Shortage = 11,800 - 10,800 = 1,080 rides per day d.No. The bus company has no incentive to supply more than 10,800 rides per day, as long as the price is restricted at $1.00. class=answers-bank-image d-inline rel=preload > b 1 a 1  = -6,480 b 1  = 10,800  *  = $1.00 per ticket Q *  = 10,800 E d  = -0.60 E s  = 1.0 a.Demand: Q d  = a 0  + a 1 P Supply: Q s  = b 0  + b 1 P Use: E =   ×   to compute a 1  and b 1 . E d  =   a 1  E s  =   b 1  -0.60 =   a 1  1.0 =   b 1  a 1  = -6,480 b 1  = 10,800              10,800 = a 0  - 6,480.00(1.0) 10,800 = b 0  + 10,800.00(1.0) a 0  = 17,280 b 0  = 0.0 Q d  = 17,280 - 6,480P Q s  = 0.0 + 10,800P b.New demand = (1.10)Q d  = (17,280 - 6,480P)(1.10) Q d ' = 19,008.00 - 7,128P Equate Q d ' to Q s  to get new equilibrium price.19,008 - 7,128P = 0.0 + 10,800 P P *  = $1.06 per ticket c.The shortage would be the quantity demanded at P = $1.00 minus the quantity supplied at P=$1.00. Q d  = 19,008 - 7,128($1.00) = 11,880 Q s  = 0.0 + 10,800($1.00) = 10,800 Shortage = 11,800 - 10,800 = 1,080 rides per day d.No. The bus company has no incentive to supply more than 10,800 rides per day, as long as the price is restricted at $1.00. class=answers-bank-image d-inline rel=preload >      *  = $1.00 per ticket Q *  = 10,800 E d  = -0.60 E s  = 1.0 a.Demand: Q d  = a 0  + a 1 P Supply: Q s  = b 0  + b 1 P Use: E =   ×   to compute a 1  and b 1 . E d  =   a 1  E s  =   b 1  -0.60 =   a 1  1.0 =   b 1  a 1  = -6,480 b 1  = 10,800              10,800 = a 0  - 6,480.00(1.0) 10,800 = b 0  + 10,800.00(1.0) a 0  = 17,280 b 0  = 0.0 Q d  = 17,280 - 6,480P Q s  = 0.0 + 10,800P b.New demand = (1.10)Q d  = (17,280 - 6,480P)(1.10) Q d ' = 19,008.00 - 7,128P Equate Q d ' to Q s  to get new equilibrium price.19,008 - 7,128P = 0.0 + 10,800 P P *  = $1.06 per ticket c.The shortage would be the quantity demanded at P = $1.00 minus the quantity supplied at P=$1.00. Q d  = 19,008 - 7,128($1.00) = 11,880 Q s  = 0.0 + 10,800($1.00) = 10,800 Shortage = 11,800 - 10,800 = 1,080 rides per day d.No. The bus company has no incentive to supply more than 10,800 rides per day, as long as the price is restricted at $1.00. class=answers-bank-image d-inline rel=preload > 10,800 = a 0  - 6,480.00(1.0) 10,800 = b 0  + 10,800.00(1.0)a 0  = 17,280 b 0  = 0.0Q d  = 17,280 - 6,480P Q s  = 0.0 + 10,800Pb.New demand = (1.10)Q d  = (17,280 - 6,480P)(1.10)Q d ' = 19,008.00 - 7,128PEquate Q d ' to Q s  to get new equilibrium price.19,008 - 7,128P = 0.0 + 10,800 PP *  = $1.06 per ticketc.The shortage would be the quantity demanded at P = $1.00 minus the quantity supplied at P=$1.00.Q d  = 19,008 - 7,128($1.00) = 11,880Q s  = 0.0 + 10,800($1.00) = 10,800Shortage = 11,800 - 10,800 = 1,080 rides per dayd.No. The bus company has no incentive to supply more than 10,800 rides per day, as long as the price is restricted at $1.00.

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