Most Caribbean countries have some type of controls on the provision of taxi services. Individuals that provide taxi services must first obtain a license and maintain certain standards for the driver and vehicle. Let’s investigate the implications of such a system. Suppose that the marginal cost per trip of a taxi rise is $5 and the average taxi has a capacity of 20 trips per day. Let the demand function for taxi rides be given by D(p)=1100-20p, where demand is measured in rides per day and is measured in dollars. Assume that the industry is (perfectly) competitive:
a. What is the competitive equilibrium price per ride? What is the equilibrium number of rides per day? What is the minimum number of taxi cabs in equilibrium?
b. During the tourist season, the influx of tourists increases the demand for taxi rides to D(p)=1500-20p. Assuming that the number of taxis is fixed at the amount found in part (a), what would be the equilibrium price, equilibrium number of rides per day and profit per cab.
c. Now suppose that the change in demand for taxicabs in part (b) is permanent. Find the equilibrium price, equilibrium number of rides per day, and profit per cap per day. How many taxi cabs will be operated in equilibrium? Compare and contrast this equilibrium with that of part (b). Explain any differences.