Q # 1 {Chapter # 4}

(a) If there are no restrictions on the number of taxi rides that can be supplied then in that case the equilibrium quantity will be 11 million taxi rides and the equilibrium price will be $6.5. This is illustrated in the diagram below :

(b) If the Mayor set the price ceiling at $5.5 then in that case there will be a shortage of the 4 million taxi rides ($13M rides-$9M rides). The taxi drivers lose because now the fare per taxi ride has reduced from $6.5 to $5.5. Also the people who are unable to get a taxi ride at $5.5 (since the demand for the taxi rides is now being more than the supply of the taxi rides) will also stand to lose. Those who are able to get the taxi ride at $5.5 are benefited from this policy. This is illustrated in the diagram below :

(c) Since the stock market crashed, the people in the Gotham city became poor. This resulted in the reduction in the demand of the taxi rides by 6 million rides per year at any given price. Since the demand for the taxi rides reduced due to a factor other than price, there will be a leftward shift in the demand curve for the taxi rides. Thus the new equilibrium quantity will be 8 million taxi rides and equilibrium price will be $5 per taxi ride. This is illustrated in the diagram and the grid below :

Fare per ride | Quantity Demanded | Quantity Supplied | 7 | 4 | 12 | 6.5 | 5 | 11 | 6 | 6 | 10 | 5.5 | 7 | 9 | 5 | 8 | 8 | 4.5 | 9 | 7 |

(d) The mayor announces a policy in which the operating licenses are given to the existing taxi drivers and the number of licenses is restricted such that only 10 million rides per year can be given. Due to this policy the consumers will have to pay $7 per ride and out of this taxi drivers will get to keep $6 and the remaining $1 will go to the government. This $1 that goes to the government will be known as the quota per ride.