Question

Use the following information to answer questions 7 - 12. Suppose there is one buyer located at points 1 through 11, one unit of distance apart. These buyers purchase at most one unit of the product when its price is less than or equal to $10. Assume the MC and AC of producing the product is $5. Transport costs are constant per unit of distance. 7. If a seller must sell at only one point, 1-11, the profit maximizing location is a) 1 b) 5 c) 11 d) 8 e) 6 8. The total transport cost to sell to all buyers in this market when transport cost per unit distance t = 1 is a) 11 b) 15 c) 30 d) 36 e) 22

Answer 1

Here, the seller has a constant MC and the demand is constant as well. It is equal to one at prices less than equal to 10.

Since MC is equal to 5, the base price set by the seller is equal to 5. The price paid by the buyers is 5+transport costs.

7. The profit maximizing location is 6.

At this point, the maximum distance from 6 is 5 points away (1 and 11). Therefore, 5 + 5 (transport costs). Therefore, maximum price paid is 10. Since consumers will buy at price lower than 10, all consumers will be served.

At any other point, one customer will be left out. For e.g. at 5, one customer will not buy (customer 11).

Therefore, the answer is e.

8.

At 6 (0 distance), TC = 0

At 5 and 7 (1 distance), TC = 1. Therefore, TC for both = 1+1 = 2

At 4 and 8 (2 distance), TC =2. Therefore, TC for both = 2+2=4

At 3 and 9 (3 distance), TC = 3. Therefore, TC for both = 3+3=6

At 2 and 10 (4 distance), TC =4. Therefore, TC for both = 4+4=8

At 1 and 11 (5d distance), TC=5. Therefore, TC for both= 5+5=10

Total TC = 0+2+4+6+8+10 = 30

Answer: c