Reference no: EM133440465

Case Study: Suppose two bars L and R located one mile from each other at the left and right endpoints of the Boardwalk respectively. There are N consumers, uniformly distributed along the Boardwalk. At decline of day, each resident, before they begin their nightly carousing, travels to one of the bars for exactly one pint of Moloko Plus.2 Each resident pays a traveling cost of $1 per mile per pint of Moloko Plus. To make each pint of Moloko Plus, each bar needs one pint of milk, which is then transformed into Moloko plus at a cost ci < 1, i ∈ {L, R}.

Questions:

1. The bars can purchase milk from either Devlin-McGregor or Tyrell Corp. which they produce at a common marginal cost of cM < 1 per pint. If Devlin-McGregor and Tyrell Corp. have unlimited capacity and simultaneously choose a price for milk. How much will each company charge per pint in equilibrium?
2. If L and R set prices simultaneously, what will the equilibrium prices for Moloko plus of each bar as a function of cM , cL, cR?
3. What are the equilibrium quantities of Moloko plus that bar will serve in terms of cM , cL, cR?
4. Now, suppose that the Moloko Plus served by L uses whole milk, which is only produced by Devlin-McGregor, and that the Moloko Plus served by R uses skim milk, which is only produced by Tyrell Corp (Boardwalk residents have no preference over the milk used). How much will each of these firms charge per pint? What are the equilibrium prices for Moloko Plus set by L and R?