Problem 5 (6 marks)

Ken is a Boston taxi driver who has recently purchased a taxicab medallion from the Boston Police Department (BPD) Hackney Carriage Unit, which regulates the approximately 2,000 medallion-taxis in Boston, MA. The medallion is a license that enables Ken to pick up passengers anywhere in the Boston Area. The cost of the medallion for Ken was $400,000. While the medallion can be sold to another driver, only $X is refundable if the owner chooses to return it to the BPD Hackney Carriage Unit. You do not know the exact value of X, but Ken does.

After driving his cab for a while, Ken decides that he no longer wants to be a taxi driver, nor does he want to "rent" his medallion to another driver. Subsequently, he spends $7,000 placing advertisements in various newspapers in Boston and online, offering to sell the medallion for $370,000. After a long wait he finally receives one offer to purchase the medallion for $365,000.

1. a)Did Ken make the right choice by placing the advertisements? Briefly explain.
2. b)Would you recommend that Ken accept the $365,000 offer? Briefly explain.

Hint: your answers may depend on the value of X, i.e. you may have to make statements like "if X is larger than...".?