Alex is the owner of a flower shop in Kingston, Ontario, selling custom-made bouquets and arrangements...

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Alex is the owner of a flower shop in Kingston, Ontario, selling custom-made bouquets and arrangements to other Kingston businesses and private customers. Over the past 3 years, she has been developing a proprietary process of preserving her flowers by drying them to make her famous dried flower bouquets that will last for years. She has now been granted a patent, and her business is scaling rapidly. Alex is looking into outsourcing the flower preservation process. A Toronto service provider (TSP) has offered to take on the flower preservation process according to Alex specifications, for $3.00 per bouquet. However, TSP would need to make a $1,000 investment in a special flower preserving machine that is only compatible with Alex' patented bottle preservation process, meaning the machine only has a resale value of $200 for parts if it's unused, otherwise the resale value is $0. TSP can then preserve flower bouquets at $1 per bouquet, which it could only sell to Alex. If TSP does not invest in the machine, it will not make any profits from flower preservation. Alex could also preserve the flowers herself for $6 per bouquet. She already has purchase orders for 500 bouquets at $10 per bouquet. a) (4 points) Calculate Alex' rent when (i) doing the flower preservation herself and (ii) when outsourcing the flower preservation process to TSP. Furthermore, calculate TSP's rent when (iii) investing in the machine and the deal is conducted as planned. b) (2 points) What is TSP's relationship-specific investment? c) (4 points) Assume the deal falls through after TSP made the investment in the machine but before TSP started production. What is TSP's rent in this case? What is TSP's quasi rent? d) (3 points) What are the profits for Alex and TSP when the hold-up problem occurs? Hint: Assume Alex has more bargaining power and can capture TSP's full quasi-rent. e) (3 points) Fill out the game tree diagram below, where TSP is making a decision first by deciding whether to invest in the machine or not. Alex then makes a decision on whether to hold up TSP or not. Fill in the profits that both Alex and TSP receive given the decisions. f) (3 points) Assume that TSP chooses to invest. Will the hold-up problem occur in this case? Hint: Compare Alex profits given that TSP invests. Alex will choose the strategy that yields the highest profit given TSP invests. g) (3 points) Will TSP invest in the machine? Compare TSP's profits assuming TSP chooses to invest and Alex makes the profit maximizing decision from f), and TSP's profits from not investing. What are the profits for Alex and TSP in this outcome? h) (3 points) Is the outcome you have derived in g) efficient? Why? Alex is the owner of a flower shop in Kingston, Ontario, selling custom-made bouquets and arrangements to other Kingston businesses and private customers. Over the past 3 years, she has been developing a proprietary process of preserving her flowers by drying them to make her famous dried flower bouquets that will last for years. She has now been granted a patent, and her business is scaling rapidly. Alex is looking into outsourcing the flower preservation process. A Toronto service provider (TSP) has offered to take on the flower preservation process according to Alex specifications, for $3.00 per bouquet. However, TSP would need to make a $1,000 investment in a special flower preserving machine that is only compatible with Alex' patented bottle preservation process, meaning the machine only has a resale value of $200 for parts if it's unused, otherwise the resale value is $0. TSP can then preserve flower bouquets at $1 per bouquet, which it could only sell to Alex. If TSP does not invest in the machine, it will not make any profits from flower preservation. Alex could also preserve the flowers herself for $6 per bouquet. She already has purchase orders for 500 bouquets at $10 per bouquet. a) (4 points) Calculate Alex' rent when (i) doing the flower preservation herself and (ii) when outsourcing the flower preservation process to TSP. Furthermore, calculate TSP's rent when (iii) investing in the machine and the deal is conducted as planned. b) (2 points) What is TSP's relationship-specific investment? c) (4 points) Assume the deal falls through after TSP made the investment in the machine but before TSP started production. What is TSP's rent in this case? What is TSP's quasi rent? d) (3 points) What are the profits for Alex and TSP when the hold-up problem occurs? Hint: Assume Alex has more bargaining power and can capture TSP's full quasi-rent. e) (3 points) Fill out the game tree diagram below, where TSP is making a decision first by deciding whether to invest in the machine or not. Alex then makes a decision on whether to hold up TSP or not. Fill in the profits that both Alex and TSP receive given the decisions. f) (3 points) Assume that TSP chooses to invest. Will the hold-up problem occur in this case? Hint: Compare Alex profits given that TSP invests. Alex will choose the strategy that yields the highest profit given TSP invests. g) (3 points) Will TSP invest in the machine? Compare TSP's profits assuming TSP chooses to invest and Alex makes the profit maximizing decision from f), and TSP's profits from not investing. What are the profits for Alex and TSP in this outcome? h) (3 points) Is the outcome you have derived in g) efficient? Why?