Suppose there are 800 residents uniformly-spaced living on a 8-km long circular street. Each resident has a willingness to…

Question:

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Suppose there are 800 residents uniformly-spaced living on a 8-km long circular street. Each

resident has a willingness to pay for pizza of $10 and would buy 1 pizza per week. It costs a

resident $1 to travel one km. There are 4 shops located uniformly, i.e., the distance between two

neighboring shops is 2 km. Each shop is owned by independent firms. The marginal cost is $2 per

pizza and there is no fixed cost. Assume price setting behavior.

a) Derive the demand function for Shop 2 (in terms of prices of shops 1 and 3).

Hint: Q₂ = 100*(x+y)

P₂

b) Find optimum prices for all shops.

c) Assume that the firms that own shops 2 and 3 merge together. Find the optimum price for the

merged firm that now owns shops 2 and 3.

Expert Answer:

Answer rating: 100% (QA)

Lets denote the prices of pizzas at shops 1 2 and 3 as p1 p2 and p3 respectively Since the residents

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