Reference no: EM131177021
Suppose that there are two ?rms competing in the market for taxi services. Big Ben Taxis has the marginal cost MCB = $9 per trip, and the ?xed cost FCB = $3,000,000. While Whitehall Taxis has the marginal cost MCW = $15 per trip, and the ?xed cost FCW = $1,000,000. Inverse demand for taxi trips in the market is given by the function,
P = 75- Q 10,000
In this equation, P is the price of a taxi trip, and Q is the total quantity of taxi trips supplied by the two taxi companies.
Question 1: Find the equilibrium price and quantities for the case in which the two taxi companies engage in Cournot (quantity) competition. What pro?ts will Big Ben Taxis and Whitehall Taxis earn.
Question 2: Using your answers to question 1, determine which ?rm has the greater market power.
Question 3: Now suppose that a ?rm can only supply taxi services if it purchases a licence from the government. What is the highest fee that the government can charge for a license, if the government wants both Big Ben Taxis and Whitehall Taxis to purchase a license? (Note: A licence does not place a limit on the number of taxi trips a company can supply. You should assume that both ?rms are charged the same fee.)
Question 4: If, instead, the government wants to maximise the revenue it receives from taxi license fees, how many licenses should it sell, and what fee should it charge?
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