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A firm makes two goods, q1 and q2 which are imperfect substitutes. At its factory store the firm sells both goods, but mainly q2, a slightly inferior version of q1. So p1 > p2. At its retail store the firm sells both goods, but mainly q1. The cost of shipping a unit of either q1 or q2 to a retail store is s > 0. There is no shipping cost to the factory store.
(a) Why is more q1 and less q2 sold at the retail stores?
(b) Why is more q2 and less q1 sold at the factory store?
(c) Draw an indifference curve diagram illustrating your answers in (a) and (b).
(d) How might a tax t on each unit q1 bought by a customer change your answer in (a), (b) and (c)?
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