Problem Set 07

# Problem Set 07 - Econ121Fall2010 UCBerkeley ProblemSet7...

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Econ 121 – Fall 2010 UC Berkeley rofessor Cristian Santesteban P Problem Set 7 Due: Thursday, November 18 by 11:15am Problem 1 Burgers, Inc is currently the sole fast food chain in Line City, a city one‐mile long, with a single street, and one thousand consumers distributed uniformly along the street. The price for the BigB, the only product sold by Burgers, Inc is set nationally t \$4, so the local Line City manager’s decision is limited to choosing the number a and location of its stores. Each store costs \$600K to open and lasts indefinitely. Each consumer buys one burger per week at the current price of \$4. However, no consumer will walk for more than a quarter mile to buy a burger. Operating costs are \$1 per burger. The nterest rate is 0.1% per week. [Hint: The discount factor δ is related to the interest ate r a i r s follows: δ = 1/(1+r).] a) Suppose Burgers Inc faces no competition and no threat of entry. How many stores should Burgers Inc open, and at what locations?

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