Question 1. Exercise 2 from Chapter 7 in Shy (page 165)

Question 2. A unit circle representing the dimension of "mouth feel" in breakfast cereals has 200 consumers spread uniformly along it. All consumers buy either one package of cereal a week or none at all (in which case they eat bread) and incur disutility c = 200 from each unit distance by which a brand deviates from their favorite mouth feel. They derive utility v = 20 from eating bread.

a. What is the equation for the demand curve facing cereal makers? (Distinguish the monopolistic and competitive segments, but ignore the super-competitive segment.)

b. What is the symmetric equilibrium under free entry if the cereal makers' costs are C(q) = 128 +4q?

c. What if fixed costs fall to 100?

Question 3. On an atoll in the Pacific island group Saloponesia there is just one street, Ring Street, along which all people live-one islander per unit distance- and along which all shops are located. The island group used to be a French colony, which may explain the islanders' custom of walking to a nearby bakery every day to buy a fresh chocolate croissant. Their attachment to this custom is not unbounded, however. Depending upon the opportunity cost of their time spent walking, they may find croissants too expensive. In that case they stay home and eat corn flakes instead. Each of the bakers runs exactly one bakery and, when not baking, plays Bertrand.

a. Set up a model (adopting simplifying assumptions where appropriate) to analyze this croissant market, and describe the equilibrium if it is given that there are some islanders who eat corn flakes.

Question 4. Exercise 1 and 3 from Chapter 8 in Shy (pages 213-214)