1)

In the third year of operations, Mr. José Gómez asked him for an external analysis of his company
and the market. Don José informs them that the demand for the service is completely elastic, and
that he does not understand these terms. He needs your help to understand what is going on.

Explain in simple words why the demand for the service is completely elastic.

Don Jose has to understand that the elasticity of demand will tell us when the
quantity demanded of a good or service varies when its price changes, in particular
his service has a completely elastic demand, because a change either increasing
or decreasing the price will be reflected in a gigantic (infinite) variation in its
demand.
Determine if it is feasible to raise the fare arbitrarily

Being a completely elastic demand we know that its quantity demanded is very
sensitive to any variation is a price, for example, in the case of Don Jose if we
arbitrarily raise the fare from $700 to $800, it would result in a drop to 0 in the
demand for its service and therefore it is not feasible to raise the fare arbitrarily. In
addition, for example, one of the causes could be that there are many other
companies that offer the same service as Don José, so if he decides to raise the
rate, he will be rejected by consumers.
3)
Whatwould happen if in a given month, 4 buses suffer mechanical failures and 2 more are stolen
from the warehouse, will it be possible to transport and satisfy the needs of the passengers, what
effects will this situation bring and how is it possible to mitigate it?

Recalling the bidding conditions that require having 20 buses which would cover a
route of 30 kilometers in each direction, having 6 buses less would not be possible
to transport and meet the needs of all passengers, but only 70% of the total, also
this would imply a decrease in the income of the company by 30% per month
which is equivalent to the 6 buses for 16,000 passengers per month.In addition,
this would imply a decrease in the revenues of the company by 30% per month,
which is equivalent to the 6 buses for 16,000 passengers per month, and in turn
there is an adjacent damage to the consumers of collective transportation in the
Araucanía region.
To mitigate these effects, Don José should have foreseen such situations in the
first instance so as not to lose part of its operating capacity, for example, by
insuring vehicles in case of theft or investing more in the maintenance and care of
the buses. Well, but to mitigate the effects it could opt to lease 6 buses to replace
the route of the previous 6, while it solves the mechanical failures and looks for
options for the buses that were stolen.
4)
Due to constant increases in the value of a barrel of oil, fares suffer a $150 increase, finally
reaching $850. Specialists believe that the value of this commodity will continue to increase due to
fluctuations in the price of the dollar and the sanctions imposed by the US on Saudi Arabia.
Suppose that the demand for oil is elastic and the service is inelastic, and because of this, in order
to raise money, the government sets a new fuel tax. Determine what impact this new measure will
bring to passengers

The pass-through of this tax depends exclusively on the relative elasticities of

supply and demand in the market. In this particular case, since demand is inelastic
in the case of consumers and elastic in the case of suppliers, passengers
(consumers) bear the greater tax burden. Graphically it could be better
appreciated, but the essential thing is to understand that the tax will decrease the
quantity (Qo) and therefore increase the price paid by passengers and decrease
the price received by suppliers, however, the proportion in which the price paid by
passengers increases is much higher than the proportion in which the price
received by suppliers decreases.
5)
If Don José's project were social, i.e. for the full benefit of the community and the country, but in the
second year of operations it shows a negative NPV. What would this event mean? Would it be
advisable to continue with the operation of the company for the next 3 years?

Assuming that in the second year the NPV is negative, this would mean that the
project does not cover the value invested plus the cost of money (discount rate)
and the theory tells us that if the NPV is less than zero the project should be
rejected, however, the project can still be profitable at a social level thanks to the
benefits it provides to the community, so it would be advisable to calculate a Social
NPV that includes the net social benefits and the social investment in addition to
using a social discount rate.If this Social NPV is less than 0, it would not be
advisable to continue with the project for the next 3 years, unless of course the
state is the one incentivizing the project with some kind of subsidy.

6)
It has been reported that the price of the dollar is normalizing and the Chilean peso has had its best
performance in the last 3 years, it is also reported that the price of fuels will decrease by 18 pesos
per liter next Thursday. When Don José reads this, he feels very happy, since he is spending too
much and almost exceeds his budget on fuel, but the President of the Republic on national
television comments that the transportation businessmen will have to pay 3 new taxes, which brings
with it a reduction in their income.

- Based on this information alone, do you believe that a $40 fare increase would affect the demand
for service?

Considering only the information in the statement will affect demand since there is
a maximum level of payment that each user is willing to make. Although it is
possible that not only Don José will raise its fare but also its competitors, there is a
certain number of users who will stop using buses and opt for walking, all this
keeping constant other factors ("ceteris paribus") such as taste, utility, income, etc.
- If the supply of this type of service increases by 55%, is it logical to think that the price of the ticket
should decrease?

Yes, in theory it is logical to think that an increase in supply will produce a shift in
the supply curve, increasing the equilibrium quantity, but reducing the equilibrium
price (fare), but in practice there is also the possibility that because supply
increased so fast, there would be many buses and fewer people per bus.
Therefore, companies could increase rates to earn the same.
- When there are taxes on the product market, what happens to the social value of production?

Taxes alter natural balances causing inefficiency due to the misallocation of

resources in the economy. And in the particular case when there are taxes in the
product market, the social value of production will increase by approximately the
magnitude of the additional tax revenues induced by the project.