Suppose that the cost of operating a taxicab is $25,000/year and that a cab in full-time operation will collect $35,000/year in fares.
-Refer to the information above.Suppose that entry into the taxi industry is restricted but medallions (licences)can be bought and sold.If the annual interest rate on savings accounts is 10% and the market for medallions is in equilibrium,how much will a medallion cost?
A) $100.
B) $1000.
C) $10,000.
D) $100,000.
E) $1,000,000.

Question

Quizplus · Accepted Answer

To calculate the cost of a medallion, we need to find the present value of the net revenue stream. The net revenue stream is the difference between the annual fares collected and the annual cost of operating the taxi. Using the information given:
Net revenue stream = ($35,000 - $25,000) = $10,000 per year
We can use the formula for present value of an annuity:
PV = C * (1 - (1/(1+i)^n)) / i
where PV is the present value, C is the constant payment per period (in this case, $10,000), i is the interest rate, and n is the number of periods. If we assume that the medallion can be used indefinitely, then the number of periods is infinite. Plugging in the numbers:
PV = $10,000 * (1 - (1/(1+0.1)^∞)) / 0.1
PV = $100,000
Therefore, the cost of a medallion would be $100,000. Choice D is the correct answer.

Suppose That the Cost of Operating a Taxicab Is $25,000/year