The demand and supply for taxi cab Rides are given as follows;

QD = 600 + pO - pR and QS = 200 - pO + pR

Where pR is the price of a taxi ride, and pO is the price of oil. As you see, both the demand and the supply of taxi cab rides are affected by the price of oil, pO. Assume that pO < 3.

(a) For a given pO, derive the equilibrium price and quantity for the taxi rides (both the price and/or quantity might depend on pO, naturally).

Does the equilibrium price for rides increase/decrease/stay the same as the price oil increases?

Does the equilibrium quantity of rides increase/decrease/stay the same as the price oil increases?

(b) Consider the equilibrium above, as a function of the given oil price, pO. As the oil gets more expensive, what happens to the price elasticity of demand AT THE EQUILIBRIUM point? (HINT: Note that the equilibrium point itself depends on the price of oil; so write the elasticity formula for the demand curve and the equilibrium point corresponding to the given pO, and reason from that expression as to what happens to its value, as pO increases).