2. In 1992, the state of Victoria, Australia, issued master licenses, valid until 2012, to Tattersall's and Tabcorp for each to operate 13,750 slot machines at clubs and hotels. Eventually, they set up 26,682 machines at 514 locations. In April 2008, the government decided to replace the master licenses with individual transferable licenses, valid for 10 years from 2012. The market value of Tattersall's and Tabcorp fell by A$2.8 billion in one day. Subsequently, the government issued 27,290 new licenses for fees totalling A$980 million. (Source: Victorian Auditor-General, Allocation of Electronic Gaming Machine Entitlements", Victorian Government Printer, June 2011.)

(a) Consider a club that has acquired one of new 10-year licenses. Using a suitable figure, explain how the club should set the price of gambling to maximize profit. (Hint: You are free to assume any data necessary to draw the figure.)

(b)How should it take account of the once-only license fee in its decisions: (i) whether to continue in business, and (ii) its scale of operations? How does it matter that the license is transferable?

(c) Comparing the master vis-a-vis individual licensing systems, what effect do you expect on the quantity and price of gambling?