## [solution]: Suppose that there are two firms competing in the market for taxi

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Suppose that there are two firms 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 fixed 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 protsfits will Big Ben Taxis

and Whitehall Taxis earn. (11 Marks)

Question 2: Using your answers to question 1, determine which firm has the greater

market power. (4 Marks)

Question 3: Now suppose that a firm 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 firms are charged the same fee.) (2 Marks)

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? (8

Marks)

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? (8

Marks)

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