Suppose that the market for cab rides is initially in long-run equilibrium. Subsequently, an increase in population increases the demand for cab rides. In the short run, the typical cab driver is likely to:
A)earn an economic profit.
B)incur an economic loss.
C)have no change in its economic profit.
D)have neither an economic profit nor an economic loss.

Question

Quizplus · Accepted Answer

In the short run, the supply of cabs is fixed, so an increase in demand will cause an increase in price, leading to economic profits for cab drivers. However, in the long run, new firms will enter the market, increasing the supply of cabs and driving down the price, resulting in zero economic profits in the long-run equilibrium.

Suppose That the Market for Cab Rides Is Initially in Long-Run