How much economic profit will each medallion holder earn

Reference no: EM13183308

The marginal and average cost curves of taxis in Metropolis (a very small town) are constant are $0.20 per mile. The demand curve for taxi trips in Metropolis is given by,
P = 1 ? 0.00001 ? P

where P is the fare in dollars per mile Q is quantity measured in miles per year.

The industry is perfectly competitive and each cab can provide exactly 10,000 miles of service per year.

a. How many cabs will there be at equilibrium?

b. What is the equilibrium fare?

c. Now suppose the city council of Metropolis decides to curb congestion in the downtown area by limiting the number of taxis to 6. Applicants participate in a lottery and size winners get a medallion (a permanent license). What is the new equilibrium fare? How much economic profit will each medallion holder earn?

d. What is the opportunity cost associated with the medallion? How much are you willing tobuy or sell the medallion? [Hint: Assume the opportunity cost is a secure investment that yields 10% per year.]

Reference no: EM13183308

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