suppose the campus of a university with 1,000 students lies along a street which is one mile long. There are two restaurants that sell pizza by the slice, and they are located at opposite ends of the campus street. Each restaurant can produce a slice of pizza for $1.00 (marginal cost) and the quality of the pizza from the two restaurants is identical. After classes, each student would like to buy one slice of pizza (as long as it costs less than $5.00), but they are evenly distributed along the university campus street and each needs to choose which direction to walk to get pizza. They have a constant disutility of having to walk such that they are willing to pay $2.00 per mile to avoid walking. (You can ignore the presence of other restaurants and assume that students choose between only these two.) 1. If these restaurants simultaneously set prices to maximize profits, what prices will each restaurant set in equilibrium? (You don’t need to derive the equilibrium prices here if you are able to use results from the general model to determine the equilibrium prices for this example.
suppose the campus of a university with 1,000 students lies along a street which is one mile long. There are two restaurants that sell pizza by the slice, and they are located at opposite ends of the campus street. Each restaurant can produce a slice of pizza for $1.00 (marginal cost) and the quality of the pizza from the two restaurants is identical. After classes, each student would like to buy one slice of pizza (as long as it costs less than $5.00), but they are evenly distributed along the university campus street and each needs to choose which direction to walk to get pizza. They have a constant disutility of having to walk such that they are willing to pay $2.00 per mile to avoid walking. (You can ignore the presence of other restaurants and assume that students choose between only these two.)
1. If these restaurants simultaneously set
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