Answer to Question #52050 in Economics of Enterprise for lawrence

Question

If the cost per vehicle is $1.60, average utilisation 20 passengers per vehicle kilometre and average trip distance 10 kilometres
1 what is the level of bus kilometres required to service this market
2 what profits are being made
3 what type of profit is this normal or abnormal
4 what is the cost per passenger carried(as opposed to the cost per vehicle kilometre)
as this is perfect competition new firms may enter the market and compete this profits away what price therefore will ensure that only normal profits are made

Answer 1

P = N$1, Qd = 250-60P
If the cost per vehicle kilometer is N$1.60, average utilization 20 passengers per vehicle kilometer and average trip distance 10 kilometers:
1) the level of bus kilometers required to service this market is 190/20*10 = 85 thousands km.
2) the profits are TP = TR - TC = 1*190 - 1.6*85 = N$54 thousands.
3) the profit of N$54 thousands is abnormal.
4) the cost per passenger carried (as opposed to the cost per vehicle kilometer) is ATC = 136/190 = N$0.72.