Question

4. Black Sand Beach is a popular destination for holiday-makers, known for its big waves and 1 Kilometre long shoreline of unique black-coloured iron-sand. On a hot summer's day, there are 1000 beachgoers evenly scattered along the beach who all want to consume exactly 1 unit of ice cream. There are two ice cream stores (1 and 2), located at either end of the beach 1 Kilometre apart who each sells the same brand of vanilla ice cream. Each beachgoer/consumer prefers to go to the store closest to them, and incurs a travel cost of 10 per Kilometre. Assume that both firms maximise their profit by setting their (17 marks total) respective prices a. If each consumer derives U utility by consuming a unit of ice cream, what is the ice cream demand for each ice cream store? (6 marks) b. Suppose TC1 27q1 and TC2-36q2. Solve the profit maximisation problem for each ice cream store. Find each store's reaction (best response) function and solve them for the Hotelling equilibrium prices (6 marks) c. Let us define the 'marginal consumer' as the one who is indifferent between going to either store. Relative to the location of the ice creamm stores, find the location of the marginal consumer. Show her location with an appropriate diagram (5 marks)

Answer 1