Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson,Christopher Snyder

Exercise 5

Assume that the market for rental cars for business purposes is perfectly competitive, with the demand for this capital input given by
where K represents the number of cars rented by firms and v is the rental rate per day.
a. What will be the equilibrium levels for v and K in this market?
b. Suppose that following an oil embargo gas prices rise so dramatically that now business firms must take account of gas prices in their car rental decisions. Their demand for rental cars is now given by
K = 1,700 - 25v - 300g,
where g is the per-gallon price of gasoline. What will be the equilibrium levels for v and K if g = $2? If g = $3?
c. Graph your results.
d. Suppose that rental car companies complain to the government about the decline in rental rates they receive because of the increase in the gas price from $2 to $3 per gallon. What per car subsidy would be needed from the government to restore the higher rental rate firms received when the gas price was $2 per gallon? How would the benefits of this subsidy be apportioned between the demanders and suppliers of rental cars?