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.4 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.