Economical Profit Case Study Answers Assignment Sample

Ans: 1a.

One of the characteristics of a monopoly is that it has a huge entrance cost which works a barrier for the entrants to operate as a competitor. In the case of NSW, to run a taxi business there was a huge license cost which paved the way for the taxi industry to operate as a monopoly. This immense license cost has resulted in the prevalence of monopoly  until now.

Ans: 1b.

Ans: 1c.

In the long run the suppliers would have restricted the supply  converting the economiic profit into abnormal profit.

Ans: 1d.

Uber had a huge investment therefore it made the company to get through the barrier of high license cost. Moreover, the huge sunk cost was borne by the new company, which suggests that another important barrier was crossed.

Equally important, Uber exploited economies of scale by opearting on a massive scale. Huge amount was spent on the specialists who had the expertise to compete with the status quo. So the achievement of the increasing economies of scale enabled Uber to survive vis-à-vis the existing suppliers.

Ans: 2a.  

After the entrance of Uber the monopoly of the previous is finished. Now there is an increase in supply in the market as there is no single supplier in the market anymore.

Ans: 2b. 

Ans: 2c.

In a perfectly competitive market in long run marginal revenure is  equal to  average revenue and average equates with the market price. Therefore, in the perfectly competitive market there is zero economic profit and market reaches its saturation point in the long run. There is no room for the new entrant to come and earn profit, whereas in the long run of monopoly supply is well below the saturation point. In fact, supply is restricted delibrately to gain supernormal profits.

Ans: 2d.

In monopolisitic competition there is a tendency among the few suppliers to avoid doing price competition, because it is going to result in the prices going down equal to average total cost. Therefore, they have an understanding that they are going to keep prices above the market efficient equillibrium by keeping the supply in check. In the case of entrance of Uber, both suppliers will ensure, in order to reap the benefits of monopolistic competition, to prevent supply from going beyond a certain point: a point where both maximize their profits. Also, both would not probably avoid price competition, because that would mean finish of monopolistic competition.




Increase in the price of oil has caused an inward shift in the supply curve causing an increase in the price.


An increase in the license price of taxis has propelled a same response as it was in the case of increase in the price of oil.

Ans: 4a.

Ans: 4b.

Under the price ceiling, the black point at the supply curve will be supplied. The corresponding quantity on the x-axis will be catered. However, the black dot at demand supply will be the demand, and the corresponding at the x-axis represents the amount of taxi service demanded at the price ceiling. However, we see that there is a huge disparity between the amount of taxis supplied and demanded. Therefore, the amount of consumers between the two black points are going to be worse-off under the condition of price ceiling.

Ans: 4c.

The previous free market equillibirum is represented by P1 which is equivalent to $3, however an unusual increase in the demand, shown by the shift from D1 to D2, has caused price surging in the market taking price from P1 to P2.

Ans: 4d.

Under the price surging all the consumers demanding the service of taxi are getting what they have demanded; there is no shortage in supply. Also, the market is cleared and there is no intervention in the market. Whereas, in the case of price ceiling many consumers were left worse-off because of non-availibility of the service for them. Hence, should the yardstick be the free market, consumers are better-off under the ‘price surging’.



Under the conditions of perfect market competition, in long run there will be a huge influx of taxi firms congruent to Uber, because congruency of the type of good or service is the main characteristic of the perfect market. The influx will remain until there are zero economic profits after that point there will be no entry. Hence, in long run numerous firms would be competing for the taxi service inNSW. As shown in the diagram on the previous page, the individual company would be a price taker and has no control over the price. The price is determined by the total industry supply and total industry demand. Producer charging price above the market-determined price will be kicked out of the market, because consumers have perfect information of the market. In the long run consumers welfare will be maximized as the prices will then reflect the efficient market operations.

Ans: 5c.

The diagram above depicts that the demand is halved of taxi service because of the extreme weather conditions. Consequently, the price has decreased, indicated by the drop from P*1 to P*2. Supply has remained same as taxi drivers are protected by the administartion.

Ans: 5d.

With the reduction in demand it is obvious that now less people are chasing the same amount of taxis, so the simple phenomenon of basic economic tells that reduction in demand always leads to a fall in prices, ceteris paribus.


Some drivers would be unable to exit in short run because in short  run they would have to bear the fixed cost regradless of they stay or not. Therefore, in order to cover the fixed costs they would continue to stay in short run despite making losses. Their criteria to stay in short run is that  there revenue should be enough that there fixed costs get cover.

The above diagram shows that if the company gets the price above PD then it can continue in short run and vice verca.



The figure shows that if in short run a firm even gets the price below P1 then it would shut down because staying in the market is resulting in an even bigger loss.


Previously in the question five we have shown that the reduction of demand has resulted in then reduction of price and quantity demanded. However, in the long run the exit of supplier due to the low demand in market brought the price back, however quantity traded decreased.

Ans: 7a.

After a decrease in supply and the demand in Taxi indusry, below figures show the eventuality when prices have gone down. The reason for this fall in price is that demand has decreased by a gretaer amount than the decrease in supply.


There is another possibility when the decrease in supply is greater than the decrease in demand and which caused the price to decrease.


In the case of flat demand curve the elasticity is great. This is vividly shown in the figure which shows that a smaller increase in the price has caused a greater increase. The point becomes even more clearer when contrasted with the figure below which shows a steep demand curve. It depicts a low elasticity to that a larger increase is responded with a smaller magnitude of change in demand. Hence the both diagram show the elasticity of demand: elastic and inelastic.


Once again elasticities are depicted by showing the nature of the curve, but this time it has to do with the supply responsiveness vis-à-vis price. Flatter supply curve depicts a more responsive and sensitive supplier’s attitude against price. Whereas, a steep supply curve is very less responsive to the changes in price.


Price elasticity of demand measures the responsiveness of demand with change in price. It is calculated by dividing percentage change in quantity demnaded by percentage change in price. Inelastic price elasticity of demand implies that consumer will respond less, in term of magnitude, to the change in price, and oppositely elastic demand means that the responsiveness would be greater with a change in price. It is an important concept as it allows suppliers to speculate the impact they would encounter when changing price.




Every market has its own context, and the elasticity of demand  varies with that. In the perfect competition demand is perfectly elastic because of infinite choices. Moreover, in the monopolistic competition choices are very much lessened therefore the elasticity decreases by a lot. And, in pure monopoly demand is very much neat to perfectly inelastic, beacause of no choice.

Ans: 8d.

The income elasticity of demand is calculated by dividing percentage change in income with the percentage in quantity demanded. It pertains with elasticity of demand in a way that both calculate the impact on quantity demanded. Cross elasticity of demand gauges the impact of the change in the price of one good on the demand of the other good.