In 2012, two Oakland City Council members called for slashing the annual fees th

Question

In 2012, two Oakland City Council members called for slashing the annual fees the city charges for taxi medallions from $1,019 a year to $510 (Matthai Kuruvila, "Cheaper Oakland Taxi Medallions Proposed," San Francisco Chronicle, December 17, 2012). They say that they want to help cabdrivers. Cab companies own and pay for the medallions. These companies charge drivers $500 a week to use the cabs. Would cutting the annual medallion fee help driversExplain. Assume cab companies will pass at least a portion of the savings in lower annual medallion fees on to cabdrivers in the form of lower per-week cab fees. Also assume that the number of medallions is not fixed. Cutting the medallion fee would O A. help cabdrivers by reducing entry barriers. OB. hurt cabdrivers by increasing competition O C. hurt cabdrivers by decreasing market surplus D. help cabdrivers by lowering market prices OE. help cabdrivers by increasing profit

Explanation / Answer

We are given that the companies will pass at least a portion of the reduced fees so that the per week cab fee is reduced. When the per week cab fee is reduced there will be an incentive for other part time employees to become a cab driver and this will increase competition. Increased competition will drive the prices down. The effect on Profit is uncertain because on one side the weekly fees is reduced and on the other side the prices are also reduced. Therefore option B is correct.

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