San Francisco limits the number of taxi cabs to 100 cabs. Taxi cabs are identical and have U-shaped long run cost curves. At the current market equilibrium, each cab driver currently earns positive economic pro?ts.
(a) Draw the ?rm's long run Average Cost, Marginal Cost and supply curve.In a separate graph, drawthe market supply curve and a demand curve which is consistent with cabs earning positive economic
(b) Max wrote a long letter to the mayor of San Francisco, Gavin Newsom saying "I can never ?nd a cab".The mayor writes back saying "I hear your concern.In the long run I cannot increase the number of taxis in the market for political reasons, but I will implement a lump sum subsidy £ to encourage each cab driver to work more."Show the effect of the lump sum subsidy on both graphs.What happens to equilibrium price, rides per cab and total number of cab rides?
In the same picture, ATC shifts down, but not parallel.The bottom part (horizontal) of the supply curve shifts down, but the upward sloping part remains unchanged.Marginal cost is unaffected.Therefore the market price and quantity remain unchanged, as does the number of rides given per cab.
(c) A year later, the mayor changes his mind. He removes the lump sum subsidy and imposes a speci?c subsidy of $1 per cab ride. Show the effect of the speci?c subsidy in the space below. What happens to equilibrium price, rides per cab and total number of cab rides compared to the unregulated equilibrium(no subsidies at all)?