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Royal ECON 1020 – Assignment 2 â Market Power
Price TheoryAssignment 2 â Market PowerSuppose that there are two firms competing in the market for taxi services. Big BenTaxis has the marginal cost MCB = $9 per trip, and the fixed cost FCB = $3,000,000.While Whitehall Taxis has the marginal cost MCW = $15 per trip, and the fixed costFCW = $1,000,000.Inverse demand for taxi trips in the market is given by the function,P = 75 ?Q.10,000In this equation, P is the price of a taxi trip, and Q is the total quantity of taxi tripssupplied by the two taxi companies.Question 1: Find the equilibrium price and quantities for the case in which the two taxicompanies engage in Cournot (quantity) competition. What profits will Big Ben Taxisand Whitehall Taxis earn. (11 Marks)Question 2: Using your answers to question 1, determine which firm has the greatermarket power. (4 Marks)Question 3: Now suppose that a firm can only supply taxi services if it purchases alicence from the government. What is the highest fee that the government can charge fora license, if the government wants both Big Ben Taxis and Whitehall Taxis to purchasea license? (Note: A licence does not place a limit on the number of taxi trips a companycan 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 fromtaxi license fees, how many licenses should it sell, and what fee should it charge? (8Marks)