In order to ingratiate himself with voters the mayor of

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Reference no: EM13378386

In order to ingratiate himself with voters, the mayor of Gotham City decides to lower the price of taxi rides. Assume, for simplicity, that all taxi rides are the same distance and therefore cost the same. The accompanying table shows the demand and the supply schedules for taxi rides.
QUANTITY OF RIDES (MILLIONS PER YEAR)
Fare (per ride) Quantity Demanded       Quantity supplied
$ 7.00                10                                12
$ 6.50                11                                11
$6.00                 12                                10
$5.50 13                                  9
$5.00                 14                                  8
$4.50                 15                                  7

a. assume that there are no restrictions on the number of taxi rides that can be supplied (there is no medallion system). Find the equilibrium price and quantity.

b. Suppose that the mayor sets a price ceiling at $5.50. How large is the shortage of rides? Illustrate with a diagram. Who loses and who benefits from this policy?

c. Suppose that the stock market crashes and, as a result, people in Gotham City are poorer. This reduces the quantity of taxi rides demanded by 6 million rides per year at any given price. What effect will the mayor's new policy have now? Illustrate with diagram.

d. Suppose that the stock market rises and the demand for taxi rides returns to normal (that is, returns to the demand schedule given in the table). the mayor now decides to ingratiate himself with taxi drivers. He announces a policy in which operating licenses are give to existing taxi drivers; the number of licenses is restricted such that only 10 million rides per year can be given. Illustrate the effect of this policy on the market, an indicate the resulting price and quantity transacted. What is the quota rent per ride?

Reference no: EM13378386

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