1. Before 1993 and the installation of the Mid-Levels escalators, walking up the street was much more painful than walking down This is translated by the following assumptions: " (x) = th and *, (1 ' x) = (t + ")(1 = =). with t; " 3 0. (2) Derive the identity of the consumer who is indiverent between the two shops (b) Compute the equilibrium prices and prosts of the two shops. (c) Show that Two-Chow's prosto increase if walking up the street be- comes more costly for consumers, that is if = increases (e.g, because the temperature has risen). Explain the intuition behind this result. 2. After 1993, the Mid-Levels escalators made going up and down equally painful for consumers. However, consumers had to pay a exed fee f (in- dependent of distance) to use the escalators. This is tramelated by the following assumptions: " (xx) = tx and ", (1 * x) = t(1 ' x) + f, with 13 0. (2) Derive the identity of the consumer who is indiferent between the two shops (b) Compute the equilibrium prices and prosts of the two shops. (c) Express the condition (in terms of f and t) under which the previous answers are valid (ie the condition for Too-Chow to set a price above its zero marginal cost) (d) Show that Two-Chow's prosts increase if taking the escalator be- comes less expensive, that is if f decreases Explain the intuition behind this result and contrast with your answer at (Ic). 3. Comparing your answers for (1) and (2). establish and explain intuitively the following results. (2) Too-Chow su ers from the installation of the escalators (even when its access is free, ie, for f = 0). (b) Won-Ton benests from the installation of the escalators, unless the extra transportation cost of climbing the stairs (ie, ") is too large. (To show this, set t = 2. f = 3 and compare Won-Ton's prosts for : = 1 and = =4) Solutions to Exercise 1 1. Hefore 1993 (2) The indiferent consumer is identifed by & such that I = to 1 : (1 + )(1 * *)" px that is, K. = (t+ ' ' pi + p) =(2t + :)