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1. Tractor-trailer trucks (called semis here) wse roads to move goods. Suppose that full-time service of a semi costs on average around $200,000 per year.
1. Tractor-trailer trucks (called semis here) wse roads to move goods. Suppose that full-time service of a semi costs on average around $200,000 per year. This pays for an average of 60,000 miles of travel. The main costs to the trucking service provider are for labor, fuel (including taxes), tolls, and capital. The capital cost can be thought of as cost of renting the truck for a year. a.[6] Assume for simplicity that semis are used only to transport merchandise and that they are the conly merchandise transporters. Assume that the price elasticity of demand for merchandise has magnitude 1 near the equilibrium. Explain in ordinary English what that means. (See slides 1S7.) Assume that the transportation cost is about 10% of the cost of the merchandise. If the cost of the service of senvis doubles, it adds another 10% to the cost of merchandise. What is the approximate percentage redaction in quantity demanded of merchandise? Assume that that sane percentage reduction is the percentage reduction in quanitity demanded for service of semis. b. [12] Use the information and assumptions in part a and reasoning in slides IS11 to draw reasonable demand and supply curves for service by US semis in 2023, assuming that the indastry is approximately competitive. The quantity unit is the average service of one semi in a year. Justify the slopes of the curves you drew. Hints How would doubling the cost of the service of semis affect the quantity demanded of that service? How are different suppliers' private marginal costs relasted to each other and how is the private marginal cost likely to vary depending on the mumber of semis operating when that number is below the equilibrium number? c[6] Now suppose that the taxes on senis rise so that with average travel, one senai pays $40,000 more in tax per year. Show the effect of the tax on the supply curve in your graph of part b. Make the new curve when the tax is imposed a broken curve. Show the effect of the tax increase on the equilibrium price and quantity of semi service. Try to draw these effects accurately, with the given information. Explain why they should look the way you drew them. Hint: The tax is what percentage of the initial equilibrium price of semi service? d.[10] Use infommation in the IS22 slides to draw in your graph of part b an approximate social marginal cost curve for the service of semis and label it SMC. Summarize your conclasions by answering these questions. Do the profits of suppliers of semi truck service fall by $40,000 per seni in the year? Why or why nor? About how mach does the tax redace the quantity demanded of semi service? Does the tax raise total surplus in the semi truck industry? How can you tell
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