Logistics
The due time is the beginning of class, for your specific class (i.e. 9:30 or 11:00AM).
There are two ways to hand it in:
1. Email a readable copy of the homework to the CA.
2. Hand in at the beginning of class as you come in. The problem sets will be collected before the
end of the reading reaction.
We will accept problem sets up to exactly 48 hours late for full credit. In other words, you may
submit the problem sets via email or at the beginning of class on Wednesdays and still receive
full credit. However, problem sets submitted later than this will receive zero credit.
Group work is encouraged. However, each person should write and submit his or her own
answers. Copying answers from other students, from some third party or tutor, or from any other
resource is not permitted.
At the top of your problem set, include:
? Your group members’ names
? An estimate of how much time you spent on the problem set
There are 20 possible points, plus five points of extra credit.
Hotelling Model
Problem H1 (8 points)
In-N-Out Burger is trying to determine the optimal placement of its restaurants between San Jose
and San Diego. Each consumer has a preferred restaurant location (x) and incurs travel disutility
of $0.10 for every mile between x and the closest store. Each day, 5000 people between San
Jose and San Diego might purchase from In-N-Out. They are uniformly distributed along the 500
miles between San Jose and San Diego. Consumers will buy one burger if the price plus travel
disutility is less than $5.
The marginal cost of a burger is $1 and the fixed cost of a store is $100 per day.
Hint: This is a standard Hotelling monopoly model as described in lecture.
Imagine that In-N-Out maximizes profits
a. How many restaurants will In-N-Out build?
b. What will be the price of a burger?
In-N-Out is known to be socially minded. Imagine that it instead maximizes total surplus instead
of profits.
c. How many restaurants will In-N-Out build?
d. What will be the price (or range or prices) of a burger?
e. Explain the difference (or similarity) between (a) and (c). (3 sentences or less.)

Problem H2 (3 points)
Now, imagine that In-N-Out can deliver to consumers at their specific location x. Delivery costs
are $0.10 per mile.
Hint: This is Hotelling with delivery, as described in 7.4. Re-read 7.4 and it is straightforward to
see how to proceed.
a) What is the profit-maximizing price of a (delivered) burger?
b) How many restaurants will In-N-Out build if it maximizes profits?
c) How many restaurants will In-N-Out build if it maximizes total surplus?
d) Explain the difference (or similarity) between (b) and (c). (3 sentences or less.)

Bundling
Problem B1 (4 points)
Consider the bundling model from Section 8.1.1 of Pepall. Now assume that each good can beproduced at marginal cost 0.2 per unit. (So the bundle can be produced at 0.4 per bundle.)
a) What price does the monopolist charge to sell each separately? What are profits?
b) What price does the monopolist charge if bundling? What are profits?
Problem B2 (5 points)
Continue to consider the bundling model from Section 8.1.1, except: for this problem, the
distributions of WTP R1 and R2 are no longer independent. (R 1 and R2 are still uniformly
distributed on [0,1].)
Case 1: First assume that R1 and R2 are perfectly negatively correlated, so R1+R2=1 for all
consumers.
a) What price does the monopolist charge to sell each separately? What are profits? What is
consumer surplus?
b) What price does the monopolist charge if bundling? What are profits? What is consumer
surplus?
Case 2: Now assume that R1 and R2 are perfectly positively correlated, so R1=R2 for all
consumers.
c) What price does the monopolist charge to sell each separately? What are profits? What is
consumer surplus? (Hint: This problem does not require additional calculations.)
d) What price does the monopolist charge if bundling? What are profits? What is consumer
surplus?
e) In three sentences or less, give the intuition for the difference between Case 1 and Case 2.
Problem B3 (Extra Credit: 5 points)
Bundling is not always more profitable than selling products separately. Assume that Time
Warner Cable offers two goods, Standard Cable and Cinemax. There are two types of consumers
(Jin and Hunt) that exist in equal proportions but differ in their willingness-to-pay for Standard
Cable vs. Cinemax, per the table below:
Jin
Hunt
Cinemax:
$40
$W
Standard Cable:
$16
$24
Determine the values of W for which bundling would be more profitable than not bundling.
Explain (in three sentences or less) what this says about major networks (CBS, NBS, ABC) are
bundled into a Standard Cable package but Cinemax is not. (Hint: Notice that the two consumer
types have different preferences if the goods are sold separately. Do preferences tend to differ
more across consumers for Cinemax or for the major networks?)