In Metropolis only taxicabs and privately owned automobiles are allowed to use the highway between the airport and downtown. The market for taxi cab service is competitive. There is a special lane for taxicabs, so taxis are always able to travel at 55 miles per hour. The demand for trips by taxi cabs depends on the taxi fare P, the average speed of a trip by private automobile on the highway E, and the price of gasoline G. The number of trips supplied by taxi cabs will depend on the taxi fare and the price of gasoline.
a) How would you expect an increase in the price of gasoline to shift the demand for transportation by taxi cabs? How would you expect an increase in the average speed of a trip by private automobile to shift the demand for transportation by taxi cabs? How would you expect an increase price of gasoline to shift the demand for transportation by taxi cabs?
b) Suppose the demand for trips by taxi is given by the equation Qd = 1000 + 50G - 4E - 400P. The supply of trips by taxi is given by the equation Qs = 200 - 30G + 100P. On a graph draw the supply and demand curves for trips by taxi when G = 4 and E =30. Find equilibrium taxi fare.
c) Solve for equilibrium taxi fare in a general case; that is, when you do not know G and E. Show how the equilibrium taxi fare changes as G and E change.