2. In some industries producers have to buy "quota rights" in order to legally sell output. For example, taxi drivers in some cities need to have a medallion: the number of such medallions is limited but they are bought and sold on an open market. In January 2010 the average price of NYC taxi medallions was $583,000. For purposes of this question we will assume that a seller needs one "unit" of quota rights to sell one unit of output in a given period.

b) Consider what happens when a previously unregulated industry has a quota system imposed. Assume the total units of quota available equal 90% of the pre-regulation quantity (x0) Suppose the elasticities of supply and demand are 0.333 and !0.667, respectively. What increase in consumer prices will occur (as a fraction of the pre-regulation price p0)? What will be the value
of a unit of quota rights (as a fraction of the pre-regulation price p0)?

c) Suppose a unit of quota rights allows the producer to sell a unit of output each year indefinitely into the future. How does your answer to part b) change?