Purchase Solution

Price Effects of Regulation

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The market demand for trucking services is:

P = 500 - 0.004Q

where Q is the number of units of trucking services demanded at the price P of a trucking service unit.

Before trucking deregulation occurred in 1980, the industry priced as a government sanctioned cartel (i.e., as a monopoly). Suppose that each trucking firm in the industry had a total cost function of

TC = 10 + q + 0.5q2

where TC is the firm's total cost when the firm produced q trucking units.

Suppose there were 500 trucking firms in the market before deregulation.

After deregulation, the market became perfectly competitive (but initially with just these 500 firms).

How much did the price change between regulation and deregulation? After deregulation, were these firms still profitable? In the long run, what would you expect to happen (qualitatively) in this industry? Not all quantities or prices may be in integers.

The price change between regulation and deregulation was_______________________

After deregulation, the typical firm made ________________ in profit

In the long run, I would expect (qualitatively) _______________________________________to happen in this market

Solution Summary

The market demand for trucking services is determined. The typical firms making a profit is determined.

Solution Preview

Before the deregulation, the 500 trucking firms collude with each other and produce like a monopoly: the combined market is
P = 500 - 0.004Q
TC = 10 + q + 0.5q^2
Then total revenue is TR=P*Q= (500 - 0.004Q)*Q =500 - 0.004Q^2
"^" means to the power of
then MR=dTR/dQ=500 - 0.008Q
however, the firms' MC = dTC/dQ=1+Q
MC=1+q or q=MC-1
Since there are 500 firms, ...

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