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Unformatted text preview: ng at the
company because of certain pollutants in the
air. Here then is an issue of asymmetric
information—the employer has some information about the job that he or she isn’t passing along to you. Suppose also you wouldn’t
take this job if you had this information, but
without it, you do. The general consensus
nowadays is that businesses do have the ethi- Competition for
drives similar firms
toward each other.
The process by
which this happens
is described on this
page and the next. EXH I BIT 7-4 cal responsibility to tell their customers and
employees everything relevant to either buying a product or taking a job, respectively. Where Will Firms Locate?
Economists often want to know what factors firms consider when deciding where to
locate. For example, suppose you wanted to
go into the farming business—where would
you locate? Obviously you might want to
locate where farmland is plentiful and the
climate is conducive to growing what you
want to grow (wheat, corn, etc.). Or suppose
you wanted to open up a car dealership.
Where would you locate? At First, Far Apart
To better understand how firms make
location decisions, let’s look at a hypothetical
situation, as shown in Exhibit 7-4(a). In the
exhibit, the letters A through Z represent customers and their locations (say, along a road).
You will notice that customers A–Z are evenly
distributed along this road. The numbers 1
and 2 represent competing firms, which sell
the same goods. They are currently located at
extreme ends of the road. If a customer
wants to buy a good that either firm 1 or 2
sells, the customer will go to the firm located The Location of Firms
The Location of Firms 1 2 ( a)
A B C D E F G H I J K L M N O P Q R S T U V W X Y 1 Z
A B C D E F G H I J K L M N O P 1 Q R S T U V W X Y Z 2 (c)
A B C D E F G H I J K L M N 1 2 M N O P Q R S T U V W X Y Z O P Q R S T U V W X Y Z (d)
A B C D E F 170 Chapter 7 Business Operations G H I J K L 07 (154-185) EMC Chap 07 5/8/06 4:53 PM Page 171 closer to him or her. This means that customers A–M will buy from firm 1 and customers N–Z will buy from firm 2. If you
count the number of customers that each
firm sells to, you will find the number is 13. One Firm Moves, Then the Other
Now suppose that one day firm 1 moves
to a different location, as shown in part (b).
Ask yourself how this move serves firm 1’s
best interest. The answer is that firm 1 takes
away customers from firm 2. Now customers
A–O are closer to firm 1 than firm 2, so
these customers buy from firm 1. Customers
Q–Z buy from firm 2 (P isn’t counted; he’s
the same distance from 1 and 2.). In short,
firm 1’s move put the firm closer to 15 customers instead of 13 customers, leaving 10
customers for firm 2.
Do you think firm 2 will try to counter
firm 1’s move? It is likely; after all, the firms
are competing for customers. Firm 2 moves
to a new location, as shown in part (c). Now
customers L–Z go to firm 2, leaving customers A–K to go to firm 1....
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This document was uploaded on 01/16/2014.
- Winter '14