Industrial Organization

(1) Suppose a store is located in the middle of Main Street, which is one mile long. Marginal transportation cost is given by t=$80 per mile round trip. The average production cost of the product sold is given by c=$32. Customers value each unit of our store's product at V=$50.

(a) If the firm wants to sell to only 25% of all people on Main Street, what will its price be? Is this doable?

(b) Now assume it wants to sell to 50% of the people, what will its price be? Is this doable?

(2) (unrelated to question (1). Assuming a firm wants to cover half of the market (assume the length of the market is normalized at a value of one), what is this firm's profit function (provide an abstract equation).

(3) Suppose a firm has two stores on Main Street, which is one mile long, and there are 10,000 customers on Main Street. However, the firm covers only 25% of Main Street. Marginal transportation cost is given by t=$80 per mile round trip. The average production cost of the product sold is given by c=$35. Customers value each unit of our store's product at V=$50. Store set-up cost equals F=$2,500.

(a) Calculate the maximum price the form can charge (b) Calculate the firm's profit

(4) What is the profit-maximizing number of stores (n) for a company that only covers 50% of the market. Provide an abstract equation.

(5) Suppose the price function on a monopolistic market is given by P=20-Q/100z, where z denotes an index of quality. The monopolist's cost function is given as C=1+0.9z2.
(a) How do increases in product quality z affect the demand curve and the infra-marginal and the marginal consumer?

(b) Calculate the profit-maximizing output, price and the profit-maximizing quality level. First, solve for quantity. Then solve for quality.

(6) A price-discrimination monopolist with 5 outlets delivers his product to any point in the U.S. at a fixed price. The market comprises 300m consumers and travel cost (shipping cost) equals $0.005 per mile of distance. Fixed set up cost per outlet equals $460,000; consumers' WTP is unknown. Calculate the overall shipping cost incurred by

the monopolist.

(7) Bundling. True or False?
a) A consumer will buy only good 1 if p1 b) A consumer will not buy anything if R1+R2 c) If R1+R2>pB the consumer will always buy the bundle
d) If R1+R2 e) Even if R1+R2p1 the consumer may still buy the bundle.