Suppose that the market for taxi services in a city is perfectly competitive, but that in order
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Question:
Suppose that the market for taxi services in a city is perfectly competitive, but that in order to enter the market and provide taxi services, you need to buy a $100,000 license (a "medallion").
- Consider a situation where the demand for taxi services in the city has increased, so that existing taxi firms are now earning $200,000 of economic profit. Briefly describe the transition to long-run equilibrium in this market: what will happen to the price of taxi services, the number of firms, and the profit earned by each firm.Be sure to think carefully about costs, and the calculation a firm makes when it enters this industry.
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