Question

A New York City taxi medallion, which gives the owner a license to operate a taxi, is a valuable commodity. Medallions trade in a weekly market at about a $1M each. There are 15,000 medallions outstanding today, the same as over 75 years ago. The taxi services market is an example of monopoly-like control of competition sanctioned by government regulation -- the New York City Taxi Commission. In the New York City taxi market, suppose weekly demand for taxi trips is estimated as Q = 10 - 0.5P, where Q is the number of trips in millions and P is the average dollar price of one trip. Meter rates currently regulated by the New York City Taxi Commission imply that $15 is the average fare per trip. A fully-utilized taxi can make a maximum of 140 trips per week. The typical taxi's total cost of providing Q weekly trips is C(Q) = 140 + 10Q. Total cost includes driver wages, normal economic profits for the investment in a medallion, taxi depreciation and fuel. Prepare an analysis of the NYC taxi market and answer each question below.

c. Suppose the Commission embraces a free market solution, allowing completely free entry into the taxi market and competitive market fares. If the taxi market is perfectly competitive, what price will eventually prevail for an average fare? How many trips will occur and how many fully-utilized taxis will operate in NYC?

Answer 1

Answer C) In competitive market P=MC-AC Q-10 0.5P p-20-2Q TC- CQ-140 +10Q MC 10 Now, P=MC, then 20-2Q-10 Q-5 and Price (P)-10 (P-20-2*5) Thus, if the taxi market is perfect competitive, price (P) S10 will eventually prevail an average fare. Q-5 milions numbers of trips will occur.