Virginia Tech FIN FIN 5084 A computer company A makes a device that is stocked by a retailer. Both firms act as monopolists to maximize their profits. Assume that the retail…
Both firms act as monopolists to maximize their profits. Assume that the retail demand from consumers is given by P=1000-Q. Computer Company A has constant marginal costs of $100 for making the device. The retailer also has marginal costs comprised of $100 in labor costs + the cost of purchasing its products from the manufacturer. If Computer company A sets a producer price (= $ PA) for the retailer, which the retailer takes as given, what is the retailer’s marginal cost curve? the marginal cost for retailer is $100 + PA.
• Solve for the profit maximizing solution of Q and P and mark up for Best Buy.
• Solve Computer company A’s prices and quantity, mark up. What is the relation to the Lerner index for this market?
• Does it make sense for company A to try and sell direct to consumer (i.e., the company tries to create it’s own retail network. How would demonstrate this?
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