Consider a competitive industry with a market demand curve of P = 252 – Q, where P is market price and Q is the quantity demanded in the market. Each firm in the industry has a cost function of TC = 196 + q2, if q > 0 where q is output of the individual firm (TC = 0 if q = 0). The market is initially in long-run equilibrium. The government decides to regulate the industry by issuing licences to all firms currently in the industry, and not to allow any further entry by other firms without a licence. That is, the number of licences is fixed, and entry requires that an existing licence holder sells their licence to the potential entrant, leaving the number of firms producing in the industry fixed. Subsequent to the introduction of this regulation, the market demand curve shifts to P = 432 – Q. What is the value of the licence?
Consider a competitive industry with a market demand curve of P = 252 – Q, where P is market price and Q is the quantity demanded in the market. Each firm in the industry has a cost function of TC = 196 + q2, if q > 0 where q is output of the individual firm (TC = 0 if q = 0). The market is initially in long-run equilibrium. The government decides to regulate the industry by issuing licences to all firms currently in the industry, and not to allow any further entry by other firms without a licence. That is, the number of licences is fixed, and entry requires that an existing licence holder sells their licence to the potential entrant, leaving the number of firms producing in the industry fixed. Subsequent to the introduction of this regulation, the market demand curve shifts to P = 432 – Q. What is the value of the licence?
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