The market for a (fictional) brand of car, Carro.

Consider the market for a (fictional) brand of car, Carro. We will analyze this market In isolation (neglecting its interactions with markets for other cars).…

Consider the market for a (fictional) brand of car, Carro. We will analyze this market In isolation (neglecting its interactions with markets for other cars). Carros are produced by a single producer, Carro Motors. The production technology exhibits constant returns to scale, at a marginal cost of cm = 2. There are no fixed costs. Carro Motors sells all the cars It produces to two dealers, Carro East and Carro West, who then sell the cars to consumers. The price that Carro Motors charges the dealers Is pm. Both dealers pay the same price. Each dealer, however, is allowed to charge a different price to consumers. Both dealars sell only Carro cars, and neither of the two has any costs other than the cost of buying the cars from the manufacturer. Because Carro East and Carro West sell the same physical product, customers regard buying from one dealer as a substitute for buying from the other dealer. However, because the dealers are located In differ-ent geographical areas, the substitutes are Imperfect. Therefore, the dealers face the following demand functions:qE = 8 — 3PE + Pw; qw = 8 — 3pw + PE,where pE and pw are the prices of Carros at Carro East and Carro West, respectively, and qE and qw are the quantifies sold at the two dealerships. The dealers compete by simultaneously setting prices. Please answer the following questions. Make *ire that you explain all the steps of your analysis and that you define any new notation that you use. You may assume that cars are Infinitely divisible (this can be somewhat Justified by Interpreting the quantities as shipments consisting of many cars).

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