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 − (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.

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.

2: Using your answers to question 1, determine which firm has the greater market power.

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.)

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?