Two vendors are selling bottles of cold water and they are trying to determine where along a beach they should locate. Assume that the beach is 400 yards long and that they can locate anywhere along the beach as long as they are exactly 5 feet from the water (so think of a line that is 400 yards long and is 5 feet horizontal to the shore, they will locate somewhere on that line). They charge the same price, the bottles of water are of the same quality, and they are competing against each other. The customers do not like to be near each other, so they are spread evenly along the beach. The customers also don't like walking so they purchase one bottle of water from the vendor closest to them. However, if the choice is having to walk some distance or not buy something they will walk some distance. We are trying to find where, in equilibrium, the two vendors will locate.

1. We are in equilibrium if what is true? Explain.

1. Think of the vendors choosing where to set up on a line that starts at 0 (the far left of the beach) and ends at 400 yards (the far right)

1. Assume that Vendor A sets up at the 100 yard mark and Vendor B sets up at the 300 yard mark. This is not equilibrium. Assume we go to Vendor A and say: you see where Vendor B is located. Do you want to change where you are located? Where will Vendor A want to go? Explain.

1. After Vendor A has changed where she is going to be, we go to Vendor B and ask Vendor B, do you want to change where you are located? Where will Vendor B want to move to? Explain.

1. This process will continue until in equilibrium both vendors are located where?Explain.

1. For consumers is it more convenient to have the vendors located where they are in equilibrium or would it be more convenient if they stayed where they began? Explain.