An industry is composed of an upstream sector (U) and a downstream sector (D). The sector U sells its production to the sector D which resells it to consumers. The inverse consumer demand curve is given by p = 800 - 2 y. The variable y represents both the output of sector U and the output of sector D. The wholesale price paid by sector D to sector U per unit of output is given by the variable t. Sector U has a marginal cost of production of $7. Sector D has a marginal cost of production of $3 (in addition to paying t per unit). The total profit for each sector is as follows:
πD = ( p - 3 - t ) y
πU = ( t - 7 ) y
a) Assume that there is one company in sector D and one (different) company in sector U. Find the equilibrium values of t and p.
b) Assume that there is a merger (vertical integration), so that there is only one firm that controls both upstream and downstream activities. Find the equilibrium values of t and p.
c) Assume that there is one firm in sector D and one (different) firm in sector U, but there are royalties (royalties) based on profits. That is, firm U chooses the wholesale price (t) and also chooses a royalty (R) (a dollar amount)) that will be paid by firm D to firm U. Firm D is free to choose p (or equivalently, y) in order to maximize its own profit. Find the equilibrium values of t, p, and R.

Answer rating: 100% (QA)

1 Equilibrium t402 and equilibrium p6025 2 Equilibrium t0 and equilibrium p405 3 Equilibrium t7 equi... View the full answer