1 Problem Suppose that Ikea is a monopoly in the office desks industry and buys its raw materials from Baltic Forests, a Romanian company. Baltic Forests incurs the marginal cost of $8. The (uniform) wholesale price is WB. Ikea incurs the cost of $6 per unit sold. The demand for office desks is p = 454 2Q, where p is the price charged to the final end-user and Q denotes the units demanded and sold. There are no fixed costs of production. A. (a) For a given wholesale price, wB, for Ikea, what would the retail price be? How many units (office desks) would be sold? Find Ikea's profit (as function of WB). (b) Baltic Forests sets the wholesale price WB. What would the wholesale price be? Calculate Baltic Forests's profit. Find also Ikea's profit and the retail price of an office desk. (c) Compute the markup of each company. B. Suppose now that Ikea and Baltic Forests are vertically integrated. What will the retail price be in this case? Calculate this firm's profit. C. Compare the total industry profits in parts (A) and (B). What is the effect of double marginal- ization in this industry? D. Suppose now that Ikea and Baltic Forests negotiate a franchise agreement (Baltic Forests: the franchisor; Ikea: the franchisee). Calculate the wholesale price and the retail price. Compute also the maximum fixed fee that can be requested under this agreement. 1 Problem Suppose that Ikea is a monopoly in the office desks industry and buys its raw materials from Baltic Forests, a Romanian company. Baltic Forests incurs the marginal cost of $8. The (uniform) wholesale price is WB. Ikea incurs the cost of $6 per unit sold. The demand for office desks is p = 454 2Q, where p is the price charged to the final end-user and Q denotes the units demanded and sold. There are no fixed costs of production. A. (a) For a given wholesale price, wB, for Ikea, what would the retail price be? How many units (office desks) would be sold? Find Ikea's profit (as function of WB). (b) Baltic Forests sets the wholesale price WB. What would the wholesale price be? Calculate Baltic Forests's profit. Find also Ikea's profit and the retail price of an office desk. (c) Compute the markup of each company. B. Suppose now that Ikea and Baltic Forests are vertically integrated. What will the retail price be in this case? Calculate this firm's profit. C. Compare the total industry profits in parts (A) and (B). What is the effect of double marginal- ization in this industry? D. Suppose now that Ikea and Baltic Forests negotiate a franchise agreement (Baltic Forests: the franchisor; Ikea: the franchisee). Calculate the wholesale price and the retail price. Compute also the maximum fixed fee that can be requested under this agreement