Question

1. Suppose the company White Cabs is the sole authorised operator of taxicabs in Fairville, a city of about two million people.

b) Now suppose the government allows the owner of any car to operate it as a taxi without any restriction. What would happen to profitability in the taxicab business? In particular, would the owner of a typical cab earn super-normal profit? Draw a diagram to illustrate your reasoning.

NOTE: Please explain in detail and the diagram should be very neat. Thank you!

Answer 1

Before the government regulation the supply of the taxi cars was fixed after the regulation new taxi cabs will definitely enter the market, so there will be an increase in the supply of the taxi cabs this will bring down the market price and eliminate the super normal profits enjoyed by the firms. The profitability of the business will decerase and the taxicab owner would not a super normal profit. The competition will suck out the supernormal profits.

Before the regulation the the company White Cabs was a monopoly in the industry, so the regulation broke that, the new entrants incrased the competition and drove out the profits. This decreases the average revenue of the firm and will move the average revenue curve to the left and it will be tangent to the average total cost