In 1990, the town of Ham Harbor had a more-or-less free market in taxi services. Any respectable firm could provide taxi service as long as the drivers and cabs satisfied certain safety standards.
Let us suppose that the constant marginal cost per trip of a taxi ride is $5, and that the average taxi has a capacity of 20 trips per day. Let the demand function for taxi rides be given by D(p) = 1, 200−20p, where demand is measured in rides per day, and price is measured in dollars. Assume that the industry is perfectly competitive.
(a) What is the competitive equilibrium price per ride? ______. What is the equilibrium number of rides per day? ______. How many taxicabs will there be in equilibrium? ______.
(b) In 1990 the city council of Ham Harbor created a taxicab licensing board and issued a license to each of the existing cabs. The board stated that it would continue to adjust the taxicab fares so that the demand for rides equals the supply of rides, but no new licenses will be issued in the future. In 1995 costs had not changed, but the demand curve for taxicab rides had become D(p) = 1, 220 − 20p. What was the equilibrium price of a ride in 1995? ______.
(c) What was the profit per ride in 1995, neglecting any costs associated with acquiring a taxicab license? ______. What was the profit per taxicab license per day? ______. If the taxi operated every day, what was the profit per taxicab license per year? ______.
(d) If the interest rate was 10% and costs, demand, and the number of licenses were expected to remain constant forever, what would be the market price of a taxicab license? ______.
(e) Suppose that the commission decided in 1995 to issue enough new licenses to reduce the taxicab price per ride to $5. How many more licenses would this take? ______.
(f) Assuming that demand in Ham Harbor is not going to grow any more, how much would a taxicab license be worth at this new fare? ______.
(g) How much money would each current taxicab owner be willing to pay to prevent any new licenses from being issued? ______ each. What is the total amount that all taxicab owners together would be willing to pay to prevent any new licences from ever being issued? ______. The total amount that consumers would be willing to pay to have another taxicab license issued would be (more than, less than, the same as) ______ this amount.