# Price Theory Assignment 2 – Market Power

## Price Theory Assignment 2 – Market Power

Price Theory Assignment 2 – Market Power

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Assignment 2 – Market Power

In Lumino City, the taxi industry is regulated by the Government Taxi Authority. A
company can only supply taxi services, in Lumino City, if it is issued a licence by the
Government Taxi Authority. (Note: A licence does not place a limit on the number of
taxi trips a company can supply.)
The market for taxi trips in Lumino City has the following characteristics: Inverse demand
for taxi trips is given by the function,
P = 90 −

Q
.
1000

In this equation, P is the price of a taxi trip, and Q is the total quantity of taxi trips
supplied by licensed taxi companies. The marginal cost, to a taxi company, of supplying
a taxi trip is \$18. A taxi company’s only ﬁxed cost is the cost of purchasing a licence
from the Government Taxi Authority.
Question 1: Suppose that the Government Taxi Authority issues only one license, to
Big Ben Taxis. Assuming uniform pricing, ﬁnd the quantity of taxi trips that Big Ben
Taxis will choose to supply, and the price at which these trips will be sold. Neglecting
the cost of the license, what proﬁt will Big Ben Taxis earn. (8 Marks)
Question 2: Now suppose that the Government Taxi Authority issues two licenses, to
Big Ben Taxis and Whitehall Taxis. Find the equilibrium price and quantities for the case
in which the two taxi companies engage in Cournot (quantity) competition. Neglecting
the cost of the license, what proﬁts will Big Ben Taxis and Whitehall Taxis earn. (8
Marks)
Question 3: Now suppose that the Government Taxi 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. (You should assume that, if more than one ﬁrm is present
in the market, ﬁrms engage in Cournot competition.) (4 Marks)
Question 4: Repeat question 2 for the case in which the...