Suppose the company White Cabs is the sole authorised operator of taxicabs in Fairville, a city of about two million people.

a) With the aid of a revenue-cost diagram, explain and illustrate the company's decisions with regard to output (how much service it provides) and price. What kind of market structure are you assuming here? Would you expect White Cabs to make super-normal (or above-normal, or economic) profit? Briefly explain the latter concept. (1 mark)

b)Now suppose the government allows the owner of any car to operate it as a taxi without any restriction. What would happen to profitability in the taxicab business? In particular, would the owner of a typical cab earn super-normal profit? Draw a diagram to illustrate your reasoning. (1 mark)