Imagine a country where bus and train trips between two main cities are both completely provided by private companies, and, from a consumer perspective, these services are perceived as substitutes. The demand for bus trips is:

D1= 2,500 - 250P1+ 50P2+ 2Y(1)

WhereD1is annual demand for bus trips,P1is price of bus trips,P2is price of train trips and Y is average annual income. Assume the supply of bus trips by the industry can be described by:

S1= 250P1(2)

WhereS1is the number of bus trips, and the market clears so:

D1= S1(3)

Assume the average annual income, Y, is $70,000 and the price of train trips isP2= $350. Further, assume the market always clears, there are no empty buses and trains, and producers are competitive. Ignore externalities such as pollution.

Answer the following questions:

Section B (25 Marks)

Assume the government puts a $100 tax on each bus trip, which is levied on bus companies. Answer the following questions:

1.What is the new price of bus trips to consumers? (5 Marks)

2.What is the new price of bus trips to bus companies? (5 Marks)

3.How many bus trips are now supplied and bought? (5 Marks)

4.Present the relevant diagram. (5 Marks)

5.How much tax revenue is raised? (5 Marks)

Section C (25 Marks)

The government decided not to apply the tax, and a large company who can dominate the market starts to offer trips. Its supply curve (called marginal cost curve) for bus trips is different than the supply curve for the previous companies in the market: