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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 fixed 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 Ã¢Ë†â€™ 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 profits will Big Ben Taxis
and Whitehall Taxis earn.
Question 2: Using your answers to question 1, determine which firm has the greater
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.)
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?
Big Ben Taxi servicesMarginal cost (MC) = $9Fixed Cost (FC) = $3,000,000White Hall Taxi servicesMarginal cost (MC) = $9Fixed Cost (FC) = $3,000,000Determining equilibrium price and quantity…
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