Question: Part B: Problem Set - Vertical FDI (65 points total): Consider two firms. The first firm is based in Slovenia and produces ball bearings (upstream

Part B: Problem Set - Vertical FDI (65 points total):

Consider two firms. The first firm is based in Slovenia and produces ball bearings (upstream firm). The cost of producing ball bearings is 6 per unit. The second firm is based in Greece. This firm produces machines (downstream firm). To produce one machine, the Greek firm must buy 2 ball bearings (ignore shipping costs between Slovenia and Greece). In addition, for each machine it makes, it has a production cost of 4 per machine. Machines are then sold according to the demand curve:

P = 240 - 2Q

where P is the price of a machine and Q is the total number of machines sold.

Suppose now that the Greek firm becomes a multinational corporation by acquiring the Slovenian supplier. In doing so, it must pay a fixed cost of 1,000 to the Greek government (Hint: treat this payment fee in the same way you would treat a fixed cost of production).

QUESTION: What would be the optimal quantity of machines produced by the Greek MNC? What would be the equilibrium price of machines? What would be the total profit earned by the MNC? How do these values compare to the previous scenario when the two firms acted as independent enterprises?

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