Consider the Hotelling Model as presented in class, in which firms deliver to customers.

First suppose

p=2

r=10

C0=C1=3

1. Carefully draw and label a diagram similar to the one used in

Supplemental Material

Lecture 4" on slide 20 to show what price each consumer pays, as a function of his or

her address. Make sure your diagram is consistent with the parameters given above.

2. What is the market share of each firm?

3. What is the consumer surplus for the consumer located at 2 = 0? For the consumer

located at 2

= 1? For the indifferent consumer ?

4. What are the total profits earned by each firm?

5. Now suppose p = 8 for the rest of the exercise.

6. Carefully draw and label a diagram similar to the one used in "Supplemental Material

Lecture 4" on slide 20 and part (1).

7. What is the market share of each firm?

8. What is the consumer surplus for the consumer located at 2 = 0? For the consumer

located at 2 = 1? For the indifferent consumer ?

9. What are the total profits earned by each firm?

10. What is the effect of increasing p on competition in this model?

11. Finally, suppose that co = 5 while all the other parameter values stay the same for the

last exercise.

12. What happens to the price firm O charges? What happens to concentration in the

market?