Chapter 5, Problem 1P

To determine

In order to ingratiate himself with voter, the mayo of Gotham city decides to lower the price of taxi rides. Assume, for simplicity, that all taxi rides are the same distance and therefore cost the same. The accompanying table shows the demand and supply schedules for taxi rides.

1. The equilibrium price per taxi ride and quantity of taxi rides, when there is no restriction on the number of taxi rides that can be supplied.
2. With a price celling of $ 5.50 how large is the shortage of rides (to be shown with a diagram)? Who loses and benefits from the from this policy?
3. The impact of the price celling if demand for taxi rides reduces by 6 million rides per year at any given price. (To be shown with a diagram)
4. Effect of a quota of 10 million rides per year on the market demand, supply and equilibrium price and quantity. The quota rent per ride is to de calculated.

Concept Introduction:

Price Celling:

It is a government-imposed price control or limits on the maximum price that can be charged for a product. Government exercises such controls to protect consumers from economic situations where prices of commodities could be prohibitively high.

Quota:

It is another government-imposed restriction on supply of a commodity during a particular time.

Quota Rent:

(Equilibrium price under quota − Free market equilibrium price) x amount supplied under quota