In order to ingratiate himself with voters, the mayor 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
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Quantity of Rides Demanded |
Quantity of Rides Supplied |
|
$7.00 |
10 |
12 |
|
$6.50 |
11 |
11 |
|
$6.00 |
12 |
10 |
|
$5.50 |
13 |
9 |
|
$5.00 |
14 |
8 |
|
$4.50 |
15 |
7 |
a. Assume that there are no restrictions on the number of taxi rides that can be supplied (there is no medallion system). Find the equilibrium price and quantity.
b. Suppose that the mayor sets a price ceiling at $5.50. How large is the shortage of rides? Illustrate with a diagram. Who loses and who benefits from this policy?
c. Suppose that the stock market crashes and, as a result, people in Gotham City are poorer. This reduces the quantity of taxi rides demanded by 6 million rides per year at any given price. What effect will the mayor’s new policy have now? Illustrate with a diagram.
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