10. The accompanying diagram ilustrates a taxi driver\'s Individual supply curve
ID: 1150175 • Letter: 1
Question
10. The accompanying diagram ilustrates a taxi driver's Individual supply curve (assume that each taxi ride is the same distance). Price of taxi ride s8 Quantity of taxi rides a. Suppose the city sets the price of taxi rides at $4 per ride, and at $4 the taxi driver is able to sell as many taxi rides as he desires. What is this taxi driver's producer surplus? (Recall that the area of a right triangle is ½ × the height of the triangle x the base of the triangle.) b. Suppose that the city keeps the price of a taxi ride set at $4, but it decides to charge taxi drivers a "licensing fee." What is the maximum licensing fee the city could extract from this taxi driver? c. Suppose that the city allowed the price of taxi rides to increase to S8 per ride. Again assume that, at this price, the taxi driver sells as many rides as he is willing to offer. How much producer surplus does an individual taxi driver now get? What is the maximum licensing fee the city could charge this taxi driver?Explanation / Answer
a. At a price of $4, the taxi driver supplies 40 rides and the producer surplus is the area of triangle formed above supply line which is = 0.5*4*40 = $80
b. The maximum licensing fee the city can charge is the value of producer surplus which is $80 at price of $4
c. Now with a price of $8, the taxi driver supplies 80 rides which increase producer surplus given by,
PS = 0.5*8*80 = $320
So $320 is the most the city can charge as a licensing fee at the price $8 per ride.
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