Suppose that Ikea is a monopoly in the office desks industry and buys its raw materials from Brazil Forests, a Portuguese company. Brazil 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. Part A subquestions follow: (a) For a given wholesale price, we, 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) Brazil Forests sets the wholesale price wB. What would the wholesale price be? Calculate Brazil Forest’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 Brazil 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 marginalization in this industry?
Suppose that Ikea is a
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. Part A subquestions follow:
(a) For a given wholesale price, we, 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) Brazil Forests sets the wholesale price wB. What would the wholesale price be? Calculate Brazil Forest’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 Brazil 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 marginalization in this industry?
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