A market-oriented firm will locate closest to its customers and the market. The cost of shipping its output is much higher than shipping its input. 2. Depict graphically the effects of the following changes of the bat firm’s cost curves. (shown in Figure AAA-1, Page 39). Explain any changes in the optimum location. A. The cost of shipping bats increases from $2 per ton to $4 per ton, while the cost of shipping wood remains at $1 per ton. After doubling the price of shipping bats, the new optimum location for the firm is O miles from the market.
This is because the new cost of shipping bats 0 miles is $120, while the cost of shipping wood 10 miles is $100. B. The forest at point F burns down, forcing the firm to use wood from point G which is 10 miles west of point F (20 miles from the market) Given the initial conditions of the problem, if you double the distance of the forest from the market, the cost of shipping wood 20 miles doubles to $200, and the cost of shipping bats doubles to $120. The optimum location for the firm would be O miles from the forest, which is now 20 miles from the market. . The firm starts producing bats with wood and cork, using three tons of DOD and two tons of cork to produce three tons of bats. (Cork is ubiquitous (available at all locations for the same price). Since cork is ubiquitous, it is not included in the monetary weight of inputs. The input of wood is reduced to 3 tons, so the new monetary weight for inputs would be $3. It now costs half as much to transport inputs than outputs, so the new optimum location is O miles from the market. 5. Consider a firm that delvers video rentals to its customers. See figure AAA-3, Page 42) The spatial distribution of its customers is as follows: 10 videos are levered to location W, 10 miles due west of the city center; 50 videos are delivered to the city center; 25 videos are delivered to E, 1 mile due east of the city center, and 45 videos are delivered to point F, 2 miles due east of the city. Production costs are the same at all locations. A. Using a graph, explain where the firm should locate. Explain your location choice. Location E would be the most efficient median location. The total delivery distance at this location would be 205 miles, which is the least of all the locations.
The median action will be the location where the total delivery distance is minimized. B . Suppose that point W is a valley and point F is at the top of a mountain. Wherefore, the unit cost of easterly transport (shipments from west to east) is twice the unit costs of westerly transport. If production costs are the same at all locations, where should the firm locate? Explain. Location F would be the most efficient median location. The total delivery distance at this location would be 245 miles, which is the least of all the locations. The median location will be the location where the total delivery distance is minimized. In figure AAA-4, page 44, the weight-losing firm is located at point P (the port). If the monetary weight of location B is $27 instead of $1 5, will the firm still locate at point P? No. The firm would locate one mile closer to location B. This would decrease the cost of logs from point B by $27, while increasing the cost of logs from point A by $1 5 and increasing the output transport costs by $10. This would result in a decrease of $2 in total costs. 8. There is some evidence that people have become more sensitive to air pollution.