Scenario you are currently in position 2 of a paid search term, the click-through rate is 1%, and the cost per click is $1.50. you can get into position 1 by paying $2.50 per click. in position 1, you expect a click-through rate of 1.5%. in position 3 you would pay $0.50 cost per click and have a click-through rate of 0.5%. the conversion rate once someone clicks is 10% in all 3 positions. our total profit per order—before search costs—is $30. our goal is to maximize absolute $ profit. questions a) what is the cost per order in position 2? b) what is the cost per order in position 1? c) which of the 3 positions do you want to be in? d) at what click through rate in position 1 are you indifferent between positions 1 and 2? e) what is the marginal cost per order of the orders you lose by moving from position 2 down to position 3?

Suppose that two firms produce differentiated products and compete in prices. as in class, the two firms are located at two ends of a line one mile apart. consumers are evenly distributed along the line. the firms have identical marginal cost, $60. firm b produces a product with value $110 to consumers.firm a (located at 0 on the unit line) produces a higher quality product with value $120 to consumers. the cost of travel are directly related to the distance a consumer travels to purchase a good. if a consumerhas to travel a mile to purchase a good, the incur a cost of $20. if they have to travel x fraction of a mile, they incur a cost of $20x. (a) write down the expressions for how much a consumer at location d would value the products sold by firms a and b, if they set prices p_{a} and p_{b} ? (b) based on your expressions in (a), how much will be demanded from each firm if prices p_{a} and p_{b} are set? (c) what are the nash equilibrium prices?