1. Consider a vertical market where a monopoly exotic car manufacturer (Firm M) sells to a monopoly exotic car dealership (Firm D). The dealer sells to the consumer market where demand is given by P = 450 - Q. The marginal cost to the manufacturer is $80 per car; the marginal cost to the dealer is $10 per car plus the per-unit price m paid for each car. All dollar amounts are in thousands of dollars.

1. Identify the problem for firm(s) in this market. What is the appropriate model to evaluate this problem? What evidence supports your choice of model?

1. What are the conclusions of the model for this market, i.e. what will be the expected production quantity, wholesale car price (m), retail car price (P), and profits to each firm?

1. Consider a merger between the manufacturer and dealer that results in a single monopoly firm that both produces and sells the cars.

1. What will be the marginal cost for this firm?

1. What will be the new market quantity, price, and profit? (Hint: the new firm is a monopoly.)

1. Are the firms better-off after this merger? What about consumers?

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Problem Identification In this vertical market scenario with a monopoly exotic car manufacturer Firm M and a monopoly exotic car dealership Firm D the problem is to determine the optimal production qu... View the full answer