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Question: Suppose that a supermarket offers a product selection consisting of products A and B. Consumers are willing to pay 10 euros for one unit of product A and 10 euros for product B. Consumers have heterogeneous shopping cost 2. This shopping cost is uniformly distributed over the interval [0, l()| . Consumers are of mass 10. The firm has marginal cost of 6 for productA and 0 for product B.
1. Calculate the profit-maximizing prices pa and PH. How much profit can the supermarket make?
2. Suppose that a discounter has entered the market who sells productA at its (lower) marginal cost of 4 euros. Now consumers can opt for one-stop shopping at the supermarket, two-stop shopping at the supermarket and the discounter, or not to shop at all. The shopping cost 2 applies to each stop. Determine the profit- maximizing prices of the supermarket. Determine the supermarket's profit.
3. Compare your results in (2) to those in (1). Interpret your findings.
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