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Price Competition: Now, suppose for whatever reason the government decides that BarUno will be located at 1/3 and BarDue at %. Price is still regulated. 1) Calculate the profits of each firm. Remember, treat the consumers as divisible. That is, you can get 35.5 customers, for example. 2) Now, suppose the EU passes a ban on espresso price regulation to retaliate for Italian insults of bratwurst. Location regulation stays in place. Calculate equilibrium prices and profits. 3) An enterprising legislator now proposes a law that requires espresso bars to locate as far away from each other as possible on the plaza. Who will support this change in the law, and how likely is each party to be influential? Business Location Game: Two businesses would like to sell coffee in Rome, but the price of coffee is set at 1 euro by the government (this is approximately true, by the way). Assume the cost per unit is zero. They will both locate on a single plaza and offer the exact same product. But, people do not like walking; the farther you walk for the espresso the less utility you get from it. Specifically, the value of an espresso is given by 10-(x-b)^2-p, where x is your location, b is the location of the bar, and p is the price of the espresso. Assume customers are located uniformly along a segment of the (linear) plaza from zero to 1, and assume one firm (BarUno) must locate between point 0 and point %, while the other (BarDue) locates between 7 and 1. Assume 100 total customers, but assume that customers are infinitely divisible. 1) What will the profit of each business be if they both locate in the middle of the plaza? 2) What will the profit of each business be if they locate at the extreme ends of the plaza? 3) What location will they choose if they simultaneously select a location (i.e. what is the Nash equilibrium). Interest Group Analysis: Now, consider possible coffee regulation. The single euro price is such an established tradition that no one will consider changing it. But, some enterprising legislators are considering regulating the location of the two coffee bars on the plaza. 1) If the legislature wants to maximize consumer surplus, where will it choose to force the two businesses to locate? 2) Who has the strongest incentives to fight against such a regulation? Who would fight for it? Based on what we spoke about in class, how likely is it that such support or opposition would succeed. 3) What location regulation would BarUno advocate for? What about BarDue? Do you expect them to succeed? (Hint: regulations can be bar specific). What coalition could BarUno try to develop to advocate for its preferred location regulation? Price Competition: Now, suppose for whatever reason the government decides that BarUno will be located at 1/3 and BarDue at %. Price is still regulated. 1) Calculate the profits of each firm. Remember, treat the consumers as divisible. That is, you can get 35.5 customers, for example. 2) Now, suppose the EU passes a ban on espresso price regulation to retaliate for Italian insults of bratwurst. Location regulation stays in place. Calculate equilibrium prices and profits. 3) An enterprising legislator now proposes a law that requires espresso bars to locate as far away from each other as possible on the plaza. Who will support this change in the law, and how likely is each party to be influential? Business Location Game: Two businesses would like to sell coffee in Rome, but the price of coffee is set at 1 euro by the government (this is approximately true, by the way). Assume the cost per unit is zero. They will both locate on a single plaza and offer the exact same product. But, people do not like walking; the farther you walk for the espresso the less utility you get from it. Specifically, the value of an espresso is given by 10-(x-b)^2-p, where x is your location, b is the location of the bar, and p is the price of the espresso. Assume customers are located uniformly along a segment of the (linear) plaza from zero to 1, and assume one firm (BarUno) must locate between point 0 and point %, while the other (BarDue) locates between 7 and 1. Assume 100 total customers, but assume that customers are infinitely divisible. 1) What will the profit of each business be if they both locate in the middle of the plaza? 2) What will the profit of each business be if they locate at the extreme ends of the plaza? 3) What location will they choose if they simultaneously select a location (i.e. what is the Nash equilibrium). Interest Group Analysis: Now, consider possible coffee regulation. The single euro price is such an established tradition that no one will consider changing it. But, some enterprising legislators are considering regulating the location of the two coffee bars on the plaza. 1) If the legislature wants to maximize consumer surplus, where will it choose to force the two businesses to locate? 2) Who has the strongest incentives to fight against such a regulation? Who would fight for it? Based on what we spoke about in class, how likely is it that such support or opposition would succeed. 3) What location regulation would BarUno advocate for? What about BarDue? Do you expect them to succeed? (Hint: regulations can be bar specific). What coalition could BarUno try to develop to advocate for its preferred location regulation