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Assume that the inverse demand function for a good is P = 40 – 2Q. A...

Assume that the inverse demand function for a good is P = 40 – 2Q. A monopolist retailer has exclusive rights to sell this good. A monopolist manufacturer sells the good to the retailer at price R. The retailer has an additional marginal cost equal to $2 per unit. The manufacturer’s marginal cost is $4 per unit.

a. Assume that the two firms remain independent. Determine the value of R charged by the manufacturer.

b. Now assume that the two firms merge into a vertically integrated firm. Determine the change in aggregate profits (that is, combined profits) due to the merger.

c. Determine the change in consumer surplus social welfare due to a merger of the two firms.

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