Economics Consumers are uniformly distributed on an interval of length 1. They pay transportation costs of $1 per kilometer. Each wants to buy one unit of a homogeneous good. Two firms producing this homogeneous good are located at the two end points of the interval. They simultaneously choose prices for their product. Firm 1 has the option of paying a bus company a lump sum $L so that customers can reach firm 1 with transportation costs $0.5 per kilometer (the cost of reaching firm 2 remains $1 per km). (a) How much is firm 1 willing to pay the bus company for this privilege? (b) Provide an economic explanation for your answer.

Economics Consumers are uniformly distributed on an interval of length 1. They pay transportation costs of $1 per kilometer. Each wants to buy one unit of a homogeneous good. Two firms producing this homogeneous good are located at the two end points of the interval. They simultaneously choose prices for their product. Firm 1 has the option of paying a bus company a lump sum $L so that customers can reach firm 1 with transportation costs $0.5 per kilometer (the cost of reaching firm 2 remains $1 per km). (a) How much is firm 1 willing to pay the bus company for this privilege? (b) Provide an economic explanation for your answer.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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