# 3: (6 marks) The number of taxicabs in Motorville and the taxicab fares are regulated. The fare currently charged is Rs.500 a ride. Motorville taxicab drivers want to obtain government's permission to raise the fare to increase their revenues and ask you to be their economic adviser. After studying the market, you come up with the following demand schedule for taxicab rides: Price (Rupees per ride) Quantity demanded (rides per month) 300 160 400 120 500 80 600 40 700 0 (i) Calculate the price elasticity of demand for taxicab rides as the fare rises from Rs.500 to Rs.600. Is the demand price elastic or inelastic for this fare rise? (2 Marks) (ii) What happens to the taxicab drivers' total revenue if the fare rises from Rs.500 to Rs.600? How can you use your answers in part "a" to answer this question? Should the drivers try to obtain permission to raise the fare? (2 Marks) (iii) Calculate the price elasticity of demand for taxicab rides as the fare falls from Rs.500 to Rs.400. Is the demand price elastic or inelastic for this fare decrease? (2 Marks) Question # 4: (5 marks) Price per Ice-cream (Rs.) Demand for Ice cream (Qd) Supply for Ice cream (Qs) 140 500 1500 120 750 1200 100 1000 1000 80 1250 750 60 1500 600 40 1750 300 (i) Draw the market equilibrium for Ice cream. (2 Marks) (ii) Find out equilibrium price and quantity. (0.5 Marks) (iii) Is there surplus or shortage in the market at price Rs.40? At price Rs.120? (0.5 Marks) (iv) What is the maximum price that consumer is willing to pay for 1500 bottles? (1 Mark) (v) What is the minimum price that producer is willing to accept for 1500 bottles? (1 Mark) Question # 5: (4 marks) Income of a person is Rs.8000 and he uses 60 units of a commodity. 1. Calculate income elasticity of demand when the income increased by 30% and consumption of the good is decline by 50%. (1 Mark) Also calculate 2. New income (1 Mark) 3. New consumption (1 Mark) 4. Nature of good (1 Mark) Question # 7: (5 Marks) a. Draw the cost curves for a typical firm. Explain how a competitive firm chooses the level of output that maximizes profit. At that level of output, show on your graph the firm's total revenue and total cost. (2 Marks) b. Draw the demand curve, marginal revenue curve, average total cost curve, and marginal-cost curve for a monopolist. Show the profit-maximizing level of output, the profit-maximizing price, and the amount of profit. (2 Marks) c. Why the demand curve for a firm operating in monopolistic competition is more elastic compared to the firm operating as a monopoly. (1 Mark)