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Adam and Catherine are choosing between two ice cream shops, Icy and Frosty, located at either end of a 1-mile-long beach. Adam is standing in front of Icy, while Catherine is standing in front of Frosty. Both Adam and Catherine are each willing to pay, at most, $6 for one ice cream cone. It costs them $1 to walk the 1-mile distance between the shops. Icy is government-run, so the price is fixed at exactly $4/cone and will not change. The shops face costs of $0.25/cone. What price should Frosty charge if it is to maximize its total profits from Adam and Catherine?
Answer : Willingness to pay = $6 If Frosty charge $6 , then noone will purchase from him If Frosty charge $5 , then Adam will not not purchase from him butCatherine will be indifferent between purchasing from him and Icy. Profit = $5 – $0.25 = $4.75 IfFrosty charge $4, then only catherinewill not not purchase from him. Profit…

4- $0.25 = $3.75 If Frosty charge $3, then Catherinewill purchase from him but adamwill be indifferent between purchasing from him and Icy. Profit = $3 + $3- $0.5 = $5.50 Hence , It is profitable for Frosty to charge $3.



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