2008 MT#1

Part I. Formal Models

1. Hotelling Model (about 10 minutes)

We did the basic model of 3 firms located along a line of uniformly distributed consumers under the assumption that consumers would buy from the closest vendor. However, we did not otherwise consider costs to walking further. Let us relax that assumption. To make it simple, assume that consumer are along a line of length 1, that ice cream sells at a fixed price of $1, and that consumers get utility of +1.5 from consuming ice cream and -2cd from walking distance d one-way to get ice cream and c is the unit (utility) cost of walking. Remember our base case was no equilibrium – movement to the center but infinite leap-frogging to try to grab market share.

a. Does this change the nature of the solution?

b. If so, illustrate for different values of c.

2. Duopoly. (about 10 minutes)

Set up and solve either the Stackelberg or the Nash-Cournot solution when elasticity increases by 50%.

Part II. Identifications / short answer problems. (about 10 minutes each)

3. Governance, Berle-Means and Related Issues.

Discuss the relevance of satisficing in the context of monopoly.

4. Consumer surplus and producer surplus.

Identify: what role do these concepts play? What do they leave out?

5. Monopolistic competition.

Identify: how does it differ from our models of oligopoly?

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