The market for taxi services in a Midwestern town is monopolized by firm 1. Currently, any taxi services firm must purchase a $40 thousand...

The market for taxi services in a Midwestern town is monopolized by firm 1. Currently, any taxi services firm must purchase a $40 thousand “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, firm 1 is planning to call to request that the city changes the medallion fee by $F thousand. In the following extensive game, “C and NC” represent firm 1’s strategies “call to change fee and don’t call to change fee”; “E and NE” represent firm 2’s strategies “enter and not enter”. (all payoffs are in thousands of dollars and include the current medallion fee of $40 thousand). Determine the change in the medallion fee that maximizes firm 1’s profits.