Workers must travel from Smallville to the Steel Mine and return every day. On a monthly basis, the inverse demand for bus ride is given by:
P=300-4Q
Where P is in cents per ride and Q is in thousands of rides. The Marginal cost of each ride is 50 cents (there are no economies of scale and no fixed costs).
a)Suppose that the transit business is a perfectly competitive, and there are no barriers to entry or exit. How many bus rides are sold, at what price are they sold, and what are the values of consumer and producer surplus?
b) Suppose that an exclusive license is obtained by Trailway to provide transit services between Smallville and Workplace, so that Trailway is a monopoly provider of these bus rides. How many bus rides are sold, and at what price? What are Trailway's profits, and what is the deadweight loss relative to (a) above?
c) Suppose that a government subsidy of 40 cents per ride is paid to the Trailway monopoly. How many bus rides are sold, and at what price? What are Trailway's profits, what is the cost of the government subsidy program, and what is the dead weight loss relative to (a) above?