(5) Suppose a transport cost oriented firm consumes two inputs (one from source

Question

(5) Suppose a transport cost oriented firm consumes two inputs (one from source A, the other from source B) in order to produce one output, which is consumed at the output market. a) Based on the numbers provided in the graph below, where will the company locate?

b) Now assume the monetary weight of input source B increases to $45 (all else stays the same), where will the company locate now?

c) If the all monetary weights (output as well as inputs) were equal to $10, can the firm locate anywhere? True or false? Explain. d) Is it possible that the firm’s transfer-cost-minimizing location can be anywhere? If yes, under what circumstances? If no, why not?

Explanation / Answer

Part- a) The firm will be locating at P (Nash equilibrium)

Part- b) Any location between the Port and Input B can be a possibility

Part- c) The firm will be locating at P (Nash equilibrium)

Part- d) It can be possible when the monetary weight equals zero. That is, when there is no transportation cost at all.

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