Reference no: EM131007598

In Lion City, the shuttle bus industry is regulated by the Government Bus Authority. A company can only supply bus services, in Lion City, if it is issued a licence by the Government Bus Authority. (Note: A licence does not place a limit on the number of bus trips a company can supply.) The market for bus trips in Lion City has the following characteristics: Inverse demand for bus trips is given by the function, P = 90 − Q/ 1000 In this equation, P is the price of a bus trip, and Q is the total quantity of bus trips supplied by licensed shuttle bus companies. The marginal cost, to a bus company, of supplying a bus trip is $18. A bus company’s only fixed cost is the cost of purchasing a licence from the Government Bus Authority.

a) Suppose that the Government Bus Authority offers an unlimited number of licences for sale at a price of $600,000 per license. How many companies will purchase a license? Briefly explain. (Assume that, if more than one firm is present in the market, firms engage in Cournot competition.)

b) Now Suppose that the Government Bus Authority issues two licenses, to Big Ben Bus and Whitehall Bus. Find the equilibrium price and quantities for the case in which the two bus companies engage in homogeneous goods Bertrand (price) competition. Neglecting the cost of the license, what profits will Big Ben Bus and Whitehall Busearn.

c) Explain why the Government Bus Authority has an incentive to only issue one licence. What problem does the Government Bus Authority create if it only issues one licence? Please provide graph if any.