Question

1. n the following setting of franchise for one and PS for the other retailer, find the profit for the retailer

   (p=240-2Q, MC=40, franchise fee=1500, profit sharing contract = (retailer: manufacturer)=(40:60) ).

Answer 1

Profit of the retailer ( 40% share)=$1600

Explanation & calculations------

P= 240-2Q,MC=40, franchise cost { fixed cost}= $1500

* First ,we will find profit maximising point which is determined by MR-MC rule----

* P= 240-2Q

TR= PQ= 240Q-2Q²

MR= derivative of TR-----

MR= 240-4Q

MC=40

At Equilibrium-------

240-4Q=40

Q= 50 units

Putting the value of Q in demand equation----

P= 240-2(50)=$140

* The next step is to find profit------

Profit= YR-TC

* TR= 240(50)-2(50)²{$7500

* TC= 1500+40(50)=$3500

Profit= 7500-3500=$4000

* Share of retailer =40% ( 60% is of manufacturer) = 4000×40%=$1600