Danis Drinks (DD) has a monopoly on selling drinks to people along a 1-mile stretch of beach. DD estimates that on an average day there are 1,000 sunbathers evenly spread along the beach, and that each sunbather will buy one drink per day provided that the price, plus any travel cost (here, the disutility from walking along the hot beach), does not exceed their maximum willingness to pay of V = $6. Suppose the travel cost t is $3/mile. Assume that DD wants to sell to everyone on the beach.

Suppose instead that DD is going to set up more than one stall.

Write out DDs profit function as a function of the number of stalls, assuming the firms cost per drink is constant and equal to $0.50, and that it incurs a $25 fixed cost per day for each stall.

Use the profit function to determine DDs optimal number of stalls.

What price will DD set for the drinks sold at its stalls and what will be its daily profit? Compare these to the price and profit when selling from only one location, and explain the differences.

Describe in words how a reduction in the travel cost would change the firms profit-maximizing number of stalls and the price it sets per drink. Why would these changes occur?

Assume t is still $3/mile. What is the socially optimal number of stalls? How and why does the number differ from DDs profit-maximizing number?