Thursday, December 13, 2007

Shannon's Taxis


On part e of the Shannon's Taxis problem on the 2007 exam, the answer states:

They lose $1 x 1000 = $1000 of consumers surplus on the 1000 rides they take per day they take plus 1/2 x $1 x 20 = $10 on the 20 extra rides they would have taken had the price been $5 per ride instead of $6.

Why is there a 1/2 in the last part of the answer?


if you draw the graph this should make sense. The $1000 is the rectangle of lost consumer surplus, and the $10 is the triangle of lost CS that comprises the upper part of the DWL triangle. Since the area of a triangle is 1/2 * base * height, you get the 1/2.

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