managerial economics

Display all calculations and briefly explain your answers.
There are 100 people who live along the only street in Smalltown. The street is 200 metres long. There are two video rental stores. Western rentals (W) is located 400 metres from the west end of town, and Eastern rentals (E) is located 200 metres from the east end of town. Consumers would be willing to pay a maximum of $20 to rent a movie. Suppose the prices charged for weekly movie rentals are pw = 3 and pe = 2 by Western rentals and Eastern rentals, respectively. Consumer incur a transport cost equivalent to $1 for every 100 metres they have to walk along the street (ignore the transport cost of returning movies, since movies can be returned when renting the next movie).

a)What is the net surplus from renting a movie by the consumer who lives at the extreme Western end of town? The extreme Eastern end of town?

b)Draw a graph illustrating the main street of Smalltown, and the net surplus from movie rentals by its residents.

c)What is the location of the consumer who is just indifferent between renting from W or E? Illustrate your answer o n your graph in part 5b.

d)What would pw have to be if Eastern rentals were to have a monopoly?

e)Suppose you are the manager of Western rentals, and you know your competitor is locked into a long-term lease. Your lease runs out at the end of the year. If you can relocate your store, where would you move to? Can this be a long-run equilibrium? Give a brief explanation.

managerial economics


Joined September 2008

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