Problem E2.3.1

4 points possible (graded)

You make very tasty hot dogs. You can do hot dog business in two potential monopoly markets: one inside Fenway Park, Boston's baseball stadium, and one inside TD Garden, the home arena for Boston's ice hockey team, the Bruins, and basketball team, the Celtics. The demand for hot dogs in each game in Fenway Park is

Fenway

=1005

and the demand for hot dogs per game in TD Garden is

TD

=505

. You need to pay100

dollars per game for renting the space in each market. The cost of making a hot dog is2

dollars. Assume that you can sell fractions of hot dogs.

What will the price of hot dogs in each market be if you enter both markets?

Fenway

=

unanswered

TD

=

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You are choosing which market(s) to enter. What will your decision be?

Enter the TD Garden market

Enter neither market

Enter either market, but not both

Enter both markets

Enter the Fenway Park market

unanswered

Calculate consumer surplus in the market(s) you enter.

=

unanswered

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Problem E2.3.2

8 points possible (graded)

Now suppose that Fenway Park has space for another potential hot dog seller, who can make the same hot dogs with the same marginal cost as you and has to pay the same amount of rent. Customers will always buy from the cheaper seller, but when the price is the same, they are indifferent and buy randomly (that is, each seller gets half of the customers). In the questions that are part of this problem, assume hot dog sellers are competing over price (not quantity).

If you and the other hot dog seller agreed to charge the same price that maximizes each's profit, what would this price be?

=

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What would your (alone, not combined) profit be?

=

(Express loss as a negative profit.)

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Given that the other seller agrees to charge the price you solved above, do you in fact keep your promise?

No, you will deviate

Yes, you will keep your promise

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How much will you charge?

(Assume that you can set the price down to cents (hundredths of a dollar).)

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What will your profit be?

(Round to the nearest cent.)

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And what will the profit of the other seller be?

(Round to the nearest cent.)

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Suppose both of you are operating in the market. Find the price of hot dogs such that if you and the other seller have no agreement on what price to charge, both of you acting in your own best interest charge the same price.

=

unanswered

What will the profit for each of you be?

=

unanswered

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Problem E2.3.3

1 point possible (graded)

Given the scenario described above, will a seller enter if you are already in the market?

(Assume that you are presently the only one in the market.)

No, the other seller will not enter the market

Yes, the other seller will enter the market