Economic Analysis of Business Decisions
Problem Set 4 Answers
Worth 100 points
29 Nov. 2022
Due: 6 Dec. 2022
You must provide a complete explanation of how you got your answers.
Not much raw licorice is produced in the US, and because of economies of scale there are four main importers. Schenker is the only importer of licorice to the west coast of the US while all three of Mafco, Kuenhe, and Extracts & Ingredients import to the east coast.
If the MES is so large that only one firm can efficiently supply candy makers on the west coast, will entry be accommodated?
How would one of the east coast importers deciding to supply the west coast market affect Schenker’s profits?
What actions might Schenker undertake to deter this entry?
Which of these four firms would you expect to have the most excess capacity?
The main package delivery companies are FedEx, UPS, DHL. Package delivery requires physical and human capital specific to the industry. However, much of this capital is trucks, trains, and airplanes that is fungible across routes and markets.
What kind of market structure best describes package delivery?
Would you expect firms in this industry to earn large economic profits?
You want to purchase the famous translucerator model #421 and are searching across possible venders. You know that the distribution of venders’ prices is uniform between $20 and $30. If the first store you land on offers a price of $28:
What is the probability you would get a better price on your next search?
What is the expected improvement in price conditional on you getting a better price?
If your search costs are $0.50, would you search another store?
If your search costs are $0.50, what is the highest price you that would make you stop searching?
For an arbitrary consumer with search costs s, what is the highest price they would accept?
If there is vender is selling at a price of $30, what is the lowest search cost among their customers?
Suppose a new internet technology cuts the search costs in half, what happens to the demand at the vender with a price of $30?
The pizza market in DFW is horizontally differentiated. Stores specialize in a single type of pizza and an equal number specialize in each type. With some consumers preferring deep dish (Type A) and an equal number preferring thin crust (Type B). The table below describes the dollar amount of value they get from each type.
Consumer Type A
Consumer Type B
Initially, consumers do not know which type is offered by which store. But they believe the price is $15. If they choose a store at random, what is their expected surplus?
If their cost of leaving and visiting another store is $10, would type A consumers still buy thin crust pizza if they had randomly chosen a thin crust pizza store or would they randomly search again?
Suppose that each store can blanket advertise their pizza type at an additional cost of $2 per potential consumer, whether they purchase or not. Consumers expect these costs will be passed on in higher prices. Now would type A consumers end up buying thin crust pizza?
Now suppose that stores can target market by sending ads to only their consumer segment. These cost $3 per consumer but they only pay for messages sent to their segment of the population. Would they like to engage in target marketing?
Are consumers better off with no marketing, blanket advertising, or target marketing?