Two firms are located on a road with length of 1

Marketing Jan 12, 2021

Two firms are located on a road with length of 1. A is located at 1/3 and B is located at 5/8. They sell the same good at a price of $6; each has the same cost of $2 per good. There are 380 possible customers for the entire market.

a) How many customers will A and B each face?

b) What is the profit each firm makes?

c) If each firm were located at 1/2, what would their profits be?

Expert Solution

(a) Firm A faces 11/24 of the total demand and Firm B faces 13/24 of the entire demand according to their location. Hence, Firm A serves 174 customers while firm 2 faces 206 customers.

(b)The profit earned by each firm can be calculated as follows:

Firm A: (6-2)*174 = $696

Firm B: (6-2)*206 = $824

(c) If each firm is located at 1/2, each firm faces an equal demand from 190 customers. Hence, profit of each firm equals (6-2)*190 = $$760

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