Chapter 1. Chapter 4

Step 1

Work It Out

Chapter 4

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Question

The accompanying diagram shows the demand and supply curves for taxi rides in New York City.

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A. At E1 the market is at equilibrium with 600 million miles of rides transacted at an equilibrium price of $2.50. Calculate each of the following (round to the nearest million):

Consumer surplus: Cna/muxNCTk= million

Recall that consumer surplus is measured as the area above the equilibrium price and below the demand curve. So at a price of $2.50 per mile and a quantity of 600 million miles, consumer surplus is ½ × ($5.00 − $2.50) × (600 million) = $750 million.

Consumer surplus:

Question

Producer surplus: Y4X9gzy3nmw= million

Recall that producer surplus is measured as the area below the equilibrium price and above the demand curve. So at a price of $2.50 per mile and a quantity of 600 million miles, producer surplus is ½ × ($2.50 − $0.50) × 600 million = $600 million.

Producer surplus:

Question

Total surplus: gofDAwe8FteLudMmdxMFhA== million

Recall that total surplus is the sum of both consumer and producer surplus. So at a price of $2.50 per mile and a quantity of 600 million rides, total surplus is $750 million + $600 million = $1,350 million.

Total surplus:

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Step 2

Question

B. Uber’s entry into the market reduces the quantity of rides demanded from taxis by 30% at every price, shifting the demand curve leftward. Assume that New York City politicians respond by imposing a regulated price of $2.50 per mile. Calculate consumer surplus, producer surplus, and total surplus for the taxi market after Uber has entered the market.

Consumer surplus: pvKJC7e9Qj8= million

In this case, at a regulated price of $2.50 per mile and a decrease in the demand of taxi rides, there will be only 240 million miles of rides demanded. So consumer surplus is the area above the regulated price of $2.50 and below the new demand line or ½ × ($3.50 − $2.50) × 240 million = $120 million.

Consumer surplus:

Question

Producer surplus: 7BeGhbEiu40= million

With the decrease in the demand of taxi rides, taxi riders will only demand 240 million miles of rides. It is worth noting, that at a price of $2.50 per mile taxi drivers are willing to supply up to 600 million miles of rides, creating a surplus of taxi drives. In this case, at a regulated price of $2.50 per mile and a quantity of 240 million miles, producer surplus is the area below $2.50, up to a quantity of 240 million miles and above the supply curve, which is (($2.50 − $1.30) × 240 million) + (½ × ($1.30 − $0.50) × 240 million) = $288 million + $96 = $384 million.

Producer surplus:

Question

Total surplus: 6iaqO0RNNxk= million

Recall that total surplus is the sum of both consumer and producer surplus. So at a price of $2.50 per mile and a quantity of 240 million rides, total surplus is $120 million + $384 million = $504 million.

Total surplus:

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Step 3

Question

C. After complaints from riders, New York removes the regulated price of $2.50 per mile. What happens to the equilibrium price and quantity? How will taxi drivers and riders be affected?

Equilibrium price: GNugIXTwNgFDPl12hEiSiHRITFydLOMNBfkBjazKMjr27Tpok+vhag==.

Removing the price floor will cause the price to fall to the new equilibrium price of $1.83 per mile.

Equilibrium price: ______.

Question

Equilibrium quantity: qjJcKnYH9P4sbvUqpQIMMH5lxeyP37WcAKkBKBrXaGsyrDu32L2B8g==.

At a lower price, the quantity demanded of taxi rides will increase from 240 million miles to 400 million miles.

Equilibrium quantity: ______.

Question

Taxi riders: 8odJxHZGKq5hcmCgs1NXc0wanzZ0Rvt6S2mwWLyRDvnvuMTh.

Taxi riders will be better off as they will purchase more rides at a lower price; consumer surplus will increase from $120 million to (½ × ($3.50 − $1.83) × 400 million) = $334 million.

Taxi riders: ______.

Question

Taxi drivers: o5F/n11CfYhRD6jsBVSc6aULFk/jxKPYHUlTmPVKbtrCD2uC.

Taxi drivers will be worse off. The quantity effect results in an increase in producer surplus of ½ × ($1.83 – $1.30) × (400 – 240) = $42.4 million, but the price effect causes producer surplus to fall by ($2.50 − $1.83) × 240 = $160.8 million. The net loss is $160.8 million minus $42.4 million or $118.4 million. Under a price of $2.50 per mile, producer surplus was $384 million, but at a price of $1.83 producer surplus falls to $266 million.

Taxi drivers: ______.

Question

Society: 8odJxHZGKq5hcmCgs1NXc0wanzZ0Rvt6S2mwWLyRDvnvuMTh.

Collectively society will be better off; the increase in consumer surplus offsets the loss in producer surplus.

Society: ______.

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