(b) Do you think the economist will successfully show that competition decreases prices? Explain. 10. Consider a town where all consumers are uniformly distributed along a beach of length 1. There are only two ice cream shops in the town. Shop 1 is located at the left end of the beach (point zero) and shop 2 is located at the right end of the beach (point one). Let x i denote the location of consumer i ; x i 2 [0 ; 1] . If a consumer at x i buys ice cream from store j; she gains the net utility of s j ° p j °j x i ° x j j ; where s j is the utility from purchasing j ±s ice cream, p j is the price of ice cream charged by store j; and j z j denotes the absolute value of z: Assume s 1 = 4 and s j = 3 : Marginal costs of production are zero. (a) Derive demand function for each shop. (b) What are equilibrium prices and pro°ts for both shops? (c) What are market shares in equilibrium? 11. Staples and O¢ ce Depot tried to merge their o¢ ce-supplies superstore chains in 1996. Under which of the following market de°nitions, is this merger proposal most likely to be approved? (a) A relevant market is ²market of all stores selling all non-food products³ (b) A relevant market is ²market of all stores selling o¢ ce supplies³ (c) A relevant market is ²market of o¢ ce-supplies superstores³ In reality, this merger plan was not approved. What was the main reason behind this decision of the FTC? 3
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