Consider the Salop circular city model with population density S ona circle of unit perimeter. Identical firms equidistantly locate on thecircle, each having one location, and produce a physically identicalgood. Consumers are located uniformly on the circle. Each con-sumer buys exactly one unit of the product, and always chooses thelowest sum of transportation cost and price of the product. Thetransportation cost is td where d is the distance of travel. Eachfirm's costs consist of an entry cost f and a marginal cost of pro-duction c. Consider the following two-stage game: In the first stage,potential entrants simultaneously choose whether or not to enter.In the second stage, then entering firms compete in prices.(a) Determine the price level in a symmetric equilibrium of thesecond-stage subgame. How does the price change with n? How does the parameter t affect the relationship between priceand n? Interpret your results intuitively.(b) Determine the number of firms in a pure strategy equilibrium offirst-stage entry game. Discuss how the parameters t, f, and Saffect n respectively. Interpret your results intuitively.(c) What happens to n if t → ? What happens to n and price if→ ∞? Interpret your results intuitively.f

In the symmetric equilibrium of the second-stage sub game, the price level can be determined by…

Answered: Consider the Salop circular city model…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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