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 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:

S2= 350 + 50P1(4)

1.What will be the new price of bus trips with the new supplier in the market? (5 Marks)

2.How many bus trips will now be provided by the bus companies operating before the large company entered the market? (5 Marks)

3.How many bus trips will now be provided by the new large company? (5 Marks)

4.How many bus trips will now be produced in total? (5 Marks)

5.Present the relevant diagram (5 Marks)

Section D (20 Marks)

Explain how this type of market structure could affect the market performance. How would this affect the welfare of consumers?