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Imagine a country where plane and train services between two main cities are both provided by private companies, and, from a consumer perspective these services are viewed as substitutes. The demand for plane trips is: D1 = 3,000 - 300P1 + 25P2 +3Y (1) Where D1 is annual demand for plane trips, P1 is price of plane trips, P2 is price of train trips and Y is average annual income. Assume the supply of plane trips by the aviation industry can be described by: S1 = 200P1 (2) Where S1 is plane trips per year and the market clears so: D1 = S1 (3) Assume average annual income, Y, is $75,000 and the price of train trips is P2 = $500. Further, assume the market always clears, there are no empty planes or theft of rides and producers are competitive. Ignore externalities such as anti-social behaviour and pollution. 1. What is the equilibrium price of plane trips? 2. How many plane trips are provided and purchased? 3. Calculate the producer surplus for the plane trips providers (airways companies).

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Hello,
Doesn't any body do their homework anymore? How are they supposed to learn anything?
Draw your graphs by hand or on a graphing calculator.
Think about the intersection points. (What does that mean when two curves intersect?)
Use the equation for the demand to obtain D for a particular x.
You can also determine by how much one function exceeds another for a particular value of the x variable (the graph is rather clear).
I assume you can solve a quadratic equation.
Use these hints to solve the problem.
Here is a graph. I even restricted it to the first quadrant so as not to mislead you into giving meaningless answers.


.e89465e.jpg

Hope it helps.

Posted on Oct 04, 2009

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