Managerial Economics & Business Strategy 8th Edition by Michael Baye,Jeff Prince

تمرين 18

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 l'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 if 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 it convinces the mayor to increase the medallion fee by $300,000 ( F = $300)?
d. Determine the change in the medallion fee that maximizes firm l's profits.
e. Do you think it will be politically feasible for the manager of firm 1 to implement the change in ( d )? Explain.