1. Effects of Relaxing the Medallion Policy. Consider the example of taxi medallions shown in Figure Suppose the government relaxes the policy, increasing the number of medallions from 80 to 90.
a. The price of taxi service will change from $ _____ to $ _____.
b. The miles of taxi service will change from _____ miles to _____ miles.
c. At the margin an excluded consumer would be willing to pay up to $ _____ for a mile of taxi service, while an excluded supplier would be willing to supply a mile of taxi service at a price as low as $ _____.
2. Equilibrium and Surplus in a Liver Market. The following table shows different points on the linear supply curve and linear demand curve for livers for transplant.
a. Draw the two curves and show the market equilibrium. The equilibrium price is $ _____ and the equilibrium quantity is _____ livers.
b. On your graph, show the total surplus of the liver market the sum of consumer and producer surplus.
c. Suppose the government bans the buying and selling of livers. On your graph, show the new equilibrium quantity of livers and the resulting loss in the total value of the market.
3. Barber Licensing. Consider the market for haircuts in a city. In the market equilibrium, the price per haircut is $6 and the quantity is 240 haircuts per day. For consumers, each $1 increase in price decreases the quantity demanded by 20 haircuts. For producers, each $1 increase in price increases the quantity supplied by 60 haircuts. In the market equilibrium, there are 24 barbers, each of whom produces 10 haircuts per day. Suppose the city passes a law requiring all barbers to have a license and then issues only 18 barber licenses. Each licensed barber continues to provide 10 haircuts per day. Use a completely labeled graph to show the effects of licensing on (a) the price of haircuts and (b) the total surplus in the haircut market.
4. Bidding for a Boston Taxi Medallion. In 1997, there were 1,500 taxi medallions in the city of Boston, and each medallion generated a profit of about $14,000 per year. In 1998, the city announced that it would issue 300 new taxi medallions, auctioning the new medallions to the highest bidders. Even with the new medallions, the number of taxis in the city would still be less than the number that would occur in an unregulated market. Your job is to predict the annual profit from a medallion after the new medallions were issued. To predict the new annual profit, assume the following:
The cost of providing taxi service is constant at $2.00 per mile of service.
The initial price of taxi service (with 1,500 medallions issued) is $2.14 per mile.
Each taxi (or medallion) provides 100,000 miles of service per year, so issuing the 300 new medallions increases the total quantity of taxi service from 150 million miles to 180 million miles.
The slope of the demand curve is $0.001 per million miles: For each $0.001 decrease in the price of taxi service, the quantity demanded increases by one million miles.
a. Compute the new price of taxi service.
b. Compute the new profit per medallion.
5. Eliminate the Mango Market? Draw a supply demand graph depicting a situation in which banning mango imports drives the quantity of mangos sold to zero.
6. Import Ban for Kiwi Fruit. Initially, there are no restrictions on importing kiwi fruit. The minimum supply price of domestic producers is $0.26, while the minimum supply price of foreign suppliers is $0.08. Each supply curve is linear, with a slope of $0.01 per million pounds. In the initial equilibrium, the price is $0.18 and the quantity is 10 million pounds. The demand curve has a vertical intercept of $0.38 and a slope of $0.02 per million pounds.
a. Draw a graph showing the initial equilibrium.
b. Suppose imports are banned, raising the price to $0.30. Draw a graph to show the new equilibrium and identify the new equilibrium quantity.
c. Compute the consumer surplus before the import ban and after the ban.
d. Suppose the import ban protects 10 jobs in the kiwi fruit industry. What is the cost to consumers for each jobprotected?
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