Consider the Salop circular city model with population density S ona circle of unit perimeter. Identical firms equidistantly locate on thecircle, each having one location, and produce a physically identicalgood. Consumers are located uniformly on the circle. Each con-sumer buys exactly one unit of the product, and always chooses thelowest sum of transportation cost and price of the product. Thetransportation cost is td where d is the distance of travel. Eachfirm's costs consist of an entry cost f and a marginal cost of pro-duction c. Consider the following two-stage game: In the first stage,potential entrants simultaneously choose whether or not to enter.In the second stage, then entering firms compete in prices.(a) Determine the price level in a symmetric equilibrium of thesecond-stage subgame. How does the price change with n? How does the parameter t affect the relationship between priceand n? Interpret your results intuitively.(b) Determine the number of firms in a pure strategy equilibrium offirst-stage entry game. Discuss how the parameters t, f, and Saffect n respectively. Interpret your results intuitively.(c) What happens to n if t → ? What happens to n and price if→ ∞? Interpret your results intuitively.f

In the symmetric equilibrium of the second-stage sub game, the price level can be determined by…

Answered: Consider the Salop circular city model…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Solve all parts as they are subparts. Hand written solutions are strictly prohibited.
In the Bertrand model, suppose that each firm has a marginal cost of £10 and that firm 1 sets a price of £9.99, which of the following a best-response for firm 2? Click all the correct answers. £10.01 £9.98 £10.00 £11.01 £9.99
Scenario: In the town of Isoville there are two grocery stores: Alfonso’s Ammenities and Bernice’s Bargains. The grocery stores are located at either end of the town, 1km apart. Recently, the manager of Alfonso’s Ammenities has proposed installing new self-service checkout technology, which promises to reduce the cost of each transaction at the grocery store by reducing staffing costs. The new technology is expected to reduce the marginal cost of selling a typical basket of groceries by $3. However, experience in other locations has shown that in about 25% of installations the self-service technology results in a significant increase in shop-lifting. In these cases, the need to hire extra security staff means that the marginal cost of a typical basket only falls by $1.50. Unfortunately, there is no way to know whether extra security will be required until after the new checkouts are installed.The Market: Isoville has 12,000 households, each of which purchases 1 basket of groceries per…
Consider a market with two firms. Each firm is located at one end of a line with lenght one. There is a mass one of consumers. The location of each consumer is given by 0 < x < 1 which is uniformly distributed (with density 1). Firms have no cost of production and set price simultaneously. a) Derive the demand for each firm by identifying the location of the indifferent con- sumer for each price pair. Assume that all consumers know about both products. b) Write down the profit functions and calculate the Nash equilibrium prices for both firms. c) Assume that consumers only know the product if they have received and ad. Suppose that ads are not targeted and each firm reaches any consumer with probability 0.5 with her ad. Calculate the size of the different consumer segments. Determine the resulting demand and the new Nash equilibirum prices of the firms. d) Suppose that the ads are costless. When do the firms make larger profits? With fully informed consuemers b) or with imperfect…
Ricky's Donuts sells premium donuts. Premium donuts have toppings. The demand for premium (PR) donuts is: PPR = 5.70 - 0.45QPR The marginal cost for each is: MCPR = 0.20 Now Ricky starts selling cupcakes. This creates an opportunity cost of 0.10 per premium donut as those toppings cannot be used for cupcakes. Which of the following statements is true? Ricky's Donuts sells premium donuts. Premium donuts have toppings. The demand for premium (PR) donuts is: PPR= 5.70 - 0.45QPR The marginal cost for each is: MCPR= 0.20 Now Ricky starts selling cupcakes. This creates an opportunity cost of 0.10 per premium donut as those toppings cannot be used for cupcakes. Which of the following statements is true? With the opportunity cost, Ricky should produce 9 premium donuts The opportunity cost will increase profit The opportunity cost will change the minimum average cost The opportunity cost will increase fixed costs With the opportunity cost, more premium donuts will be…
Suppose Erin gives haircuts on Saturdays to make extra money. She is the only person in town cutting hair on Saturdays and therefore has some market power. Assume that she does not incur fixed costs, and the only significant variable cost to Erin is her time. As she gives more haircuts, Erin must increasingly forgo other valuable Saturday activities. For example, if she gives one haircut, she forgoes reading the paper after breakfast. If she gives two haircuts, she gives up reading the paper and sleeping an extra half-hour. Erin's clients are a varied group willing to pay between $16.00 and $28.00 for a haircut. Assume that Erin cannot price discriminate, i.e., charge different clients different prices. If Erin charges $28.00 per haircut, she will have one client per week; if she charges $24.00, she will have two; if she charges $20.00, three, and so forth. The following table contains data on the revenues and costs of Erin's haircut business as a function of her price-quantity choice.…

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