1. i) Consider a city with two auto dealers: Toyota and Honda. Suppose they are initially located far from one another: Honda dealer is at location H and the Toyota dealer at location T. Each dealer has a fixed supply of 40 cars per week. In the initial equilibrium, each dealer faces the demand curve D' and sells its 40 cars each at a price of $12,000. Suppose that the Toyota dealer moves to a site at location H, next to the Honda dealer. Suppose the customers (40 per week) of the Toyota dealer follow the dealer to its new location. Suppose the customers at location H do not engage in any comparison shopping, after the Toyota dealer moves to the new location. Please draw a demand & supply diagram at location H to show the initial supply (SH), initial demand (DH), initial equilibrium price of $12,000, new supply with two firms at the same location (Scluster), and new demand (D"). Please comment on the price per car, if total number of customers stays the same and the customers do not engage in any comparison shopping.

ii) Now suppose the customers at location H engage in comparison shopping and the cluster attracts consumers who would otherwise not patronize either of the dealers. Draw this new demand curve (Dcluster) on your diagram in part i.

iii) Comment on the new price of cars at location H (with comparison shopping), if the dealers continue to supply only 40 cars per week.