The market for taxi services in a Midwestern town is monopolized by Firm 1. Curr
ID: 1116028 • Letter: T
Question
The market for taxi services in a Midwestern town is monopolized by Firm 1. Currently, any taxi services firm must purchase a $40,000 “medallion” from the city in order to offer its services. A potential entrant (Firm 2) is considering entering the market. Since entry would adversely affect Firm 1’s profits, the owner of Firm 1 is planning to call her friend (the mayor) to request that the city change the medallion fee by $F thousand. The extensive form representation of the relevant issues is summarized in the accompanying graph (all payoffs are in thousands of dollars and include the current medallion fee of $40,000). Notice that when F > 0, the medallion fee is increased and profits decline; when F < 0, the fee is reduced and profits increase.
a. What are Firm 1's profits if it does not call to change the fee (that is, if it opts for a strategy of maintaining the status quo)?
$
b. How much will Firm 1 earn of it convinces the mayor to decrease the medallion fee by $40,000 (F = -$40) so that the medallion fee is entirely eliminated?
$
c. How much will Firm 1 earn if if convinces the mayor to increase the medallion fee by $300,000 (F = 300)?
$
d. Determine the change in the medallion fee that maximizes Firm 1's profits.
$
e. Do you think it will be politically feasible for the manager of Firm 1 to implement the change in part d?
Yes
No
(300 - F, 200-F Enter Call to change fee -( 2 Don't enter (700 F,0) (300, 200) Don't call to change fee Enter Don't enter (700, 0)Explanation / Answer
If the firm 1 does not call then best for firm 2 is to enter. In such a case the firm 1’s profit = 300 If eliminates all F then Firm 1 earns = 300+40 = 340 because firm 2 will in such a case enter. F=300 then firm 1 will earn = 700-300 =400 because firm 2 will not enter in such a case Firm 1’s profit maximizing F is the breakeven for firm 2: 200-F200. Thus change = 200-40 = 160 Yes because profit is increased.Related Questions
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