Question

Suppose a monopoly manufacturer sells the good it produces through a monopoly retailer. The inverse demand curve for the good at the retail level is given by P = 60 − 5Q. The manufacturer’s marginal cost is constant at 10, and the retailer’s marginal cost is w + 10 where w is the wholesale price charged by the manufacturer. Both firms have no fixed costs

(a) What is the quantity sold by the retailer and what price does it charge? Both should depend on w.

(b) Now find the quantity produced by the manufacturer and the wholesale price, w.

(c) What is the price charged at the retail level? What are the profits of the manufacturer and retailer?

Answer 1