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 4%,then the equilibrium price of a medallion will be ________ and taxi drivers will earn ________ their opportunity cost.
A) $10,000;more than
B) $10,000;exactly
C) $40,000;exactly
D) $250,000;more than
E) $250,000;exactly

Question

Quizplus · Accepted Answer

The equilibrium price of a medallion will be $250,000 because the annual profit from operating a taxi is $10,000 ($35,000 - $25,000). At a 4% interest rate, $250,000 is the amount that would yield $10,000 annually. Taxi drivers will earn exactly their opportunity cost, as the profit from operating the taxi equals the interest they could earn from investing the medallion price.

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