Week 10

Question 1

What is the literal and metaphorical meaning of spatial models?

Answer 1

Literal - How the distance impacts demand/costs, etc… some locations are more attractive than others
Metaphorical - Refers to product differentiation and how firms can locate on product dimensions near/far to consumer preferences

Question 2

What do N, V, t, z, F, c, p and x mean in the monopoly model?

Answer 2

-N = number of consumers
-V = reservation price for consumers
- t = transportation cost per unit of x
- x = distance between consumer’s location and retail outlet
- z = scale of 0 to 1 of place distance
- F = fixed cost per store for retailer
- c = marginal cost for retailers
-p = price of good

Question 3

What is the value of x?

Answer 3

(V-p)/t

Question 4

What is demand for one outlet?

Answer 4

2xN = (2N/t)(V-p)

Question 5

What are monopoly profits for n stores?

Answer 5

N(V - t/2n - c) - nF

Question 6

What is the profitable inequality for a retailer?

Answer 6

n(n+1) < tN/2F
We add one to number of stores for finding answer

Question 7

What is the socially optimal inequality for number of outlets?

Answer 7

n(n+1) < tN/4F
Add one to find number of stores that is socially profitable (will be lower than private number)

Question 8

What is the socially optimal inequality for the number of outlets?

Answer 8

n(n+1) < tN/4F
Add one to find the number of stores that is socially optimal (will be lower than the private number)

Question 9

In the linear city Bertrand model, when is a consumer indifferent between the products?

Answer 9

p1+ty = p2+t(1-y)

Question 10

What is the best response for firm 1 in the linear city Bertrand model?

Answer 10

p1 = (p2+t+c)/2

Question 11

What is the nash equilibrium in the linear city Bertrand model?

Answer 11

p1=p2=c+t

Question 12

What are the limitations of the linear city Bertrand model?

Answer 12

-Endogenous location (not obvious where firms will locate)
-V can vary
-How many competitors are there?
-Unrealistic to assume even distribution of consumers

Question 13

What are the pros for the linear city Bertrand model?

Answer 13

-Takes into consideration distance and travel costs, not just price