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 A (20 Marks)

1.What is the equilibrium price of bus trips? (5 Marks)

2.How many bus trips are provided and purchased? (5 Marks)

3.Present the relevant diagram. (5 Marks)

4.Calculate the producer surplus for the bus trips providers (bus companies). (5 Marks)