Question
In: Economics
Consider the street in Idaho City, with 5000 families looking for a new tent. Each family’s...
Consider the street in Idaho City, with 5000 families looking for a new tent. Each family’s maximum willingness to pay for a tent is $120. In addition to the price at the store, each family bears a cost of $20 per mile to transport the tent home. Suppose there is a single tent seller on this street, Camping Gears, CG, and CG is planning to open new branches in this camping town along this street. CG has a constant unit cost of $40 per tent, and the fixed cost of opening a new branch is $2000.
(a) If CG wants to set a price low enough to serve all 5000 families, what is the highest price it can set if CG will have 1 branch? 2 branches? 3 branches? What is the highest price it can set if CG will have n branches?
(b) Write CG’s profit function with n branches and find the optimal number of branches if CG wants to serve all families.
(c) What is the total transportation cost paid by all customers when CG has only one branch? 2 branches? 3 branches? What is the total transportation cost paid by all customers when CG has n branches?
(d) Write the cost minimization problem for the sum of the total transportation and set-up costs. Solve for the optimal number of branches that maximizes total surplus.
Solutions
Rahul Sunny answered 1 year agoRelated Solutions
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