Pizzaggio, where everyone lives along Via Cantonale, is 5 miles long. There are 2000 people uniformly spread along Via Cantonale, and every day they each buy a Pizza from one of the two stores located at either and of the street. Customers ride their motor scooters to and from the store. Travelling the whole town once back and forth costs a customer 10 CHF. Customers buy their Pizza from the store offering at the lowest cost, which is the store's price plus the customer's travel expenses getting to and from the store. Customers' valuation of a Pizza is 30 CHF. Ben owns the store at the west and of Via Cantonale and Will owns the store at the east end of Via Cantonale. The marginal cost of a Pizza is constant and equal to C₁ = 6 CHF for Ben and equal to C₂ = 3 CHF for Will. In addition, each of them incurs a fixed cost of 2500 CHF per day. a) Suppose that Ben and Wil compete in prices and set prices simultaneously (i.e. assume Bertrand competition). What prices will Ben and Will set? How many customers does each store serve and what are their profits? b) Now assume again Bertrand competition as in a). Furthermore, assume that the inhabitants of Pizzaggio can travel for free to both stores. What prices would Ben and Will set? How many customers would go to Ben and how many to Will? What are their profits?
Pizzaggio, where everyone lives along Via Cantonale, is 5 miles long. There are 2000 people uniformly spread along Via Cantonale, and every day they each buy a Pizza from one of the two stores located at either and of the street. Customers ride their motor scooters to and from the store. Travelling the whole town once back and forth costs a customer 10 CHF. Customers buy their Pizza from the store offering at the lowest cost, which is the store's price plus the customer's travel expenses getting to and from the store. Customers' valuation of a Pizza is 30 CHF. Ben owns the store at the west and of Via Cantonale and Will owns the store at the east end of Via Cantonale. The marginal cost of a Pizza is constant and equal to C₁ = 6 CHF for Ben and equal to C₂ = 3 CHF for Will. In addition, each of them incurs a fixed cost of 2500 CHF per day. a) Suppose that Ben and Wil compete in prices and set prices simultaneously (i.e. assume Bertrand competition). What prices will Ben and Will set? How many customers does each store serve and what are their profits? b) Now assume again Bertrand competition as in a). Furthermore, assume that the inhabitants of Pizzaggio can travel for free to both stores. What prices would Ben and Will set? How many customers would go to Ben and how many to Will? What are their profits?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Question 5
Pizzaggio, where everyone lives along Via Cantonale, is 5 miles long. There are 2000 people uniformly spread along Via
Cantonale, and every day they each buy a Pizza from one of the two stores located at either and of the street.
Customers ride their motor scooters to and from the store. Travelling the whole town once back and forth costs a
customer 10 CHF. Customers buy their Pizza from the store offering at the lowest cost, which is the store's price plus
the customer's travel expenses getting to and from the store. Customers' valuation of a Pizza is 30 CHF. Ben owns the
store at the west and of Via Cantonale and Will owns the store at the east end of Via Cantonale. The marginal cost of a
Pizza is constant and equal to c₁ = 6 CHF for Ben and equal to c₂ = 3 CHF for Will. In addition, each of them incurs a fixed
cost of 2500 CHF per day.
a)
Suppose that Ben and Wil compete in prices and set prices simultaneously (i.e. assume Bertrand competition).
What prices will Ben and Will set? How many customers does each store serve and what are their profits?
b) Now assume again Bertrand competition as in a). Furthermore, assume that the inhabitants of Pizzaggio can
travel for free to both stores. What prices would Ben and Will set? How many customers would go to Ben and
how many to Will? What are their profits?
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