Industrial Organization
Problem Set #4, Answers
Due on Wednesday, Nov 16, 2010, in class
(1) A shop is located in the middle of Main Street, which is one mile long. Marginal
transportation cost is given by t=$80 per mile. The average production cost of the
product sold is given by c=$8. Customers value each unit of our store’s product at
V=$50.
(a)
If the firm wants to sell to all people on Main Street, what will its price be
Answer: $10
(b)
Take your result from (a) and suppose that setting up the store cost a fixed amount
of F=$100, how many customers will the firm need to break even?
If profit is zero we need N(5080/28)100 to equal zero
This is met when N=50
(c)
The firm considers opening a second store, which will also cost F=$100. How
many customers will the shop now need to break even (round up to the next
integer)? What will the price be?
It will need only 10 customers (exactly 9.09) to break even. The price will now be
at p=V(t/2n) = 50(80/4)=30
(2) Assume there is one store on Main Street, which, again, is one mile long. The
marginal transportation cost is given by $10 per mile. The average production cost of
the product sold is given by c=$8. The store sells the good for $10 each. Customers
value each unit of our store’s product at V=$12.
(a) How much of the market does the firm cover (calculate this as a fraction of 1)
Answer: If it sells for $10 and T=$10 per mile, V12 will be reached at a distance of
x=0.2 in both direction. That is the firm will cover 40% (or 0.4) of the market.
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 Spring '11
 Storchmann
 french fries, Fries, CS Fries

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