Consider the linear city model. Suppose there are 1,000 people uniformly distributed along the city, which...

Consider the linear city model. Suppose there are 1,000 people uniformly distributed along the city, which is 10 km long. Each customer buys 1 unit. Suppose firm one is located 1 km left of the centre and firm two is located 2km to right of the centre. Each firm has a marginal cost of zero. Suppose also that the customers have a travel cost of $5 per kilometre.

1. Sketch firm A’s demand curve for the cases in which firm B sets price equal to $10. Be sure to clearly label the intercepts of the demand curve.

2. Suppose firm A charges a price of $20 and firm B charges a price of $35. What are the sales of firm A and firm B?

3. Suppose that Firm B decreases their price by 10% to increase their market share. Calculate the elasticity of demand and the increased number of customers.

4. Suppose the firms moved to the centre of the city. Explain what effect this would have on the prices charged by each firm.

5. What if instead of customers being uniformly distributed along the city there was a higher density of customers closer to the edges of the city. How might that affect the firms’ location choice?

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Expert Solution

Rahul Sunny answered 1 year ago

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