Suppose that every year the city of New York auctions off a limited number of medallions that give cab drivers an exclusive right to taxi in the city for one year. After receiving the medallion the cab driver is essentially a monopolist facing an inverse demand function p = 20 - 1.8Q. The total cost function for each cab driver can be summarized as C(Q) = 3Q + F. Where F represents the cost of the medallion or annual fixed cost. What would each taxi medallion have to cost in the long run for this to be a case of monopolistic competition.
Marginal cost (MC) = dC(Q)/dQ = 3
Average cost (ATC) = C(Q)/Q = 3 + (F/Q)
In the long run equilibrium of monopolistic competition, MR = MC and P = ATC.
Total revenue (TR) = P x Q = 20Q - 1.8Q2
MR = dTR/dQ = 20 - 3.6Q
Equating with MC,
20 - 3.6Q = 3
3.6Q = 17
Q = 4.72
P = 20 - (1.8 x 4.72) = 20 - 8.5 = 11.5
ATC = 3 + (F/4.72)
Equating P and ATC,
11.5 = 3 + (F/4.72)
F/4.72 = 8.5
F = 40.12
Suppose that every year the city of New York auctions off a limited number of medallions that give cab drivers an exclusive right to taxi in the city for one year. After receiving the medallion the ca...
Suppose that every year the city of New York auctions off a limited number of medallions that give cab drivers an exclusive right to taxi in the city for one year. After receiving the medallion the cab driver is essentially a monopolist facing an inverse demand function p = 20 - 1.4Q. The total cost function for each cab driver can be summarized as C(Q) = 3Q + F. Where F represents the cost of the medallion or annual fixed...
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...