Author Question: Refer to Figure 4-8. To legally drive a taxicab in New York City, you must have a medallion issued ... (Read 129 times)

nmorano1 · **on:** Jun 29, 2018

Refer to Figure 4-8. To legally drive a taxicab in New York City, you must have a medallion issued by the city government. Assume that only 13,200 medallions have been issued.

Let's also assume this puts an absolute limit on the number of taxi rides that can be supplied in New York City on any day, because no one breaks the law by driving a taxi without a medallion. Assume as well that each taxi provides 6 trips per day. In that case, the quantity of taxi rides supplied is 79,200 (or 6 rides per taxi 13,200 taxis). This is shown in the diagram with a vertical line at this quantity. Assume that there are no government controls on the prices that drivers can charge for rides.
a. What would the equilibrium price and quantity be in this market if there was no medallion requirement?
b. If there was no medallion requirement, indicate the area that represents consumer surplus.
c. If there was no medallion requirement, indicate the area that represents producer surplus.
d. If there was no medallion requirement, indicate the area that represents economic surplus.
e. What are the price and quantity with the medallion requirement?
f. With a medallion requirement in place, what area represents consumer surplus?
g. With a medallion requirement in place, what area represents producer surplus?
h. With a medallion requirement in place, what area represents the deadweight loss?
i. Based on your answers to parts (c) and (g), are taxicab drivers better off with the medallion requirement for taxicabs than without?
j. Are consumers better off with or without the medallion requirement for taxicabs?

Question 2

Suppose you came across the following headline in a story of a daily newspaper: Automobile prices are so high right now that there must be a shortage. As a consequence not everyone who needs an automobile will be able to buy one.

Is this statement necessarily correct?

voltaire123 · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

a. P = 20, Q = 100,000 rides.
b. Consumer Surplus = A + B+ H.
c. Producer Surplus = C + D + J.
d. Economic Surplus = A + B + C + D + H + J.
e. P = 30, Q = 79,200.
f. Consumer surplus with medallion = A.
g. Producer surplus with medallion = B + C + D.
h. Deadweight loss = H + J.
i. Taxi drivers are better off with the requirement because producer surplus is greater by the area of B - J.
j. Consumers are better off without the medallion requirement.

The initial shortage of apartments is (50,000 - 20,

Answer to Question 2

First of all we have to conclude that all buyers who wish to buy automobiles at the prevailing prices will be able to do so. There will of course be others who are simply unwilling or unable to pay the current price. Secondly, we cannot say that there is a shortage at the current price. If there were then the price would simply rise to choke off the excess demand.