3. Mainsville is a town in rural Pennsylvania. The town is composed of eighty households, evenly distributed (equal distance from each other) along a one mile stretch of the main street of the town. The households are mostly rich farmers who do their own taxes, which is a time consuming task (time they could be spending on their farms). They value the amount of earnings they lose because they have to spend time doing their taxes at $100. The company TaxOn considers this town an opportunity for them to expand their business. They decide they would like have operations in Mainsville. The fixed cost of opening one office is $100. In addition the cost of preparing the tax returns for each client is $25. Finally, suppose the transportation cost for the households is $10/mile.

(a) Suppose TaxOn decides they should open just one office and serve the entire town. Where should they locate their office and what price should they charge for their services to maximize profits? What is the profit they earn? (b) Upper management of TaxOn decides that opening just one office may not be optimal, in terms of maximizing profits. How many offices should they open then in order to maximize their profits (assuming that TaxOn still wants to serve the entire market)? What price should TaxOn charge for their services in this case? Where should these offices be located on the main street? (c) Is serving the entire market optimal? Why or why not? (d) If TaxOn now decides to send their tax consultants door to door (that is TaxOn delivers their services to the households), what price will they charge for their services? If TaxOn still operates two offices, would they be willing to go to all the houses? Explain why or why not?

4. How is vertical product differentiation different from horizontal differentia- tion? How do consumers differ from each other in a market where products are vertically differentiated? Page 2