A unit circle representing the dimension of ”mouth feel” in breakfast cereals has 200 con- sumers spread uniformly along it. All consumers buy either one package of cereal a week or none at all (in which case they eat bread) and incur disutility c = 200 from each unit distance by which a brand deviates from their favorite mouth feel. The reservation price is: v = 20.
a) What is the equation for the demand curve facing cereal makers? (Distinguish the monopolistic and competitive segments)
b) What is the symmetric equilibrium under free entry if the cereal makers’ costs are C(q) = 128 + 4q?
c) What if fixed costs fall to 100?