1. In the last decade or so there has been a dramatic expansion of small retail

Question

1. In the last decade or so there has been a dramatic expansion of small retail convenience stores (such as Kwik Shops, WaWa, 7-Elevens, Gas ‘N Shops) although their prices are generally much higher than those in the large supermarkets. What explains the success of the convenience stores?

2. Many apartment-complex owners are installing water meters for each individual apartment and billing the occupants according to the amount of water they use. This is in contrast to the former procedure of having a central meter for the entire complex and dividing up the water expense as part of the rent. Where individual meters have been installed, water usage has declined 10 to 40 percent. Explain this drop, referring to price and marginal utility.

Explanation / Answer

1. Even though the prices for the goods are higher, as the name implies, retail convenience stores are often much more convenient than larger retail grocers, pharmacies, and other places where these goods are purchased. Consumers are willing to pay a premium for this convenience, and this translates to higher prices. As long as consumers are willing to pay this premium, these convenience stores will continue to be successful 2. When everyone in the complex shares the bill, an individual occupant's water usage contributes only a portion to the total, and this cost is not fully internalized. When the water usage of individual apartments are metered, and their occupants billed accordingly, each household pays for all its own water usage, and its water usage only. Here they will use as much water as they want until their marginal utility from using more water is equal to the unit/marginal price of the water.

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