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- In a perfectly competitive market, the price is determined where the demand curve intersects the marginal cost curve. This intersection point represents the competitive equilibrium. Show more…
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A small town is served by many competing supermarkets, which have the same constant marginal cost. a. Using a diagram of the market for groceries, show the consumer surplus, producer surplus, and total surplus. b. Now suppose that the independent supermarkets combine into one chain. Using a new diagram, show the new consumer surplus, producer surplus, and total surplus. Relative to the competitive market, what is the transfer from consumers to producers? What is the deadweight loss?
While there is a degree of differentiation between major grocery chains like Albertsons and Kroger, the regular offering of sale prices by both firms for many of their products provides evidence that these firms engage in price competition. For markets where Albertsons and Kroger are the dominant grocers, this suggests that these two stores simultaneously announce one of two prices for a given product: a regular price or a sale price. Suppose that when one firm announces the sale price and the other announces the regular price for a particular product, the firm announcing the sale price attracts 1000 extra customers to earn a profit of $5000, compared to the $3000 earned by the firm announcing the regular price. When both firms announced the sale price, the two firms split the market equally (each getting an extra 500 customers) to earn profits of $2000 each. When both firms announced the regular price, each company attracts only its 1500 loyal customers and the firms each earned $4500 in profits. If you were in charge of pricing at one of these firms, would you have a clear-cut pricing strategy? If so, explain why if not explain why not and propose A mechanism that might solve your dilemma. (Hint: unlike Walmart, neither of these two firms guarantees "Everyday low prices".)
Breanna O.
In the twentieth century, department stores and supermarkets largely replaced smaller specialty stores, as consumers found it more efficient to go to one store rather than many stores. Consumers incur a transaction or search cost to shop, primarily the opportunity cost of their time. This transaction cost consists of a fixed cost of traveling to and from the store and a variable cost that rises with the number of different types of items the consumer tries to find on the shelves. By going to a supermarket that carries meat, fruits and vegetables, and other items, consumers can avoid some of the fixed transaction costs of traveling to a separate butcher shop, produce mart, and so forth. Use math or figures to explain why a shopper's average costs are lower when buying at a single supermarket than from many stores. (Hint: Define the goods as the items purchased and brought home.
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