"Tiffany" is a retailer monopolist who makes a unique product called the "diamond ring" that requires exactly one diamond as input, which is sold by a wholesaler monopolist, the "Diamond Corporation". Diamond Corporation faces a marginal cost of £60 per unit of input (this is also the firm's average cost). Assume that “Tiffany" faces the following inverse demand curve for diamond rings: Pt = 320 – Qt where Pt is the price of red diamond rings in pounds per unit and Qt is the quantity of diamond rings offered for sale by “Tiffany". Similarly, Diamond Corporation charges a price, Pa, for the inputs in £ per unit and Qa is the quantity of inputs sold by Diamond Corporation. a) Derive the profit-maximising price and output for both firms, assuming that the two monopolists act as independent profit-maximising companies. Calculate profits of each firm. Use a clear diagram to illustrate your answers to explain your calculations. b) Now assume that the two firms merge. Calculate the post-merger profit-maximising price and sales for diamond rings. Calculate the joint profits of the two firms and the price charged to consumers. Use a clear diagram to illustrate your answers to explain your calculations. c) What is the effect of the merger on final consumer surplus? If you are now advising the government on whether to prevent the merger, what would your advice be, and why?
"Tiffany" is a retailer monopolist who makes a unique product called the "diamond ring" that requires exactly one diamond as input, which is sold by a wholesaler monopolist, the "Diamond Corporation". Diamond Corporation faces a marginal cost of £60 per unit of input (this is also the firm's average cost). Assume that “Tiffany" faces the following inverse demand curve for diamond rings: Pt = 320 – Qt where Pt is the price of red diamond rings in pounds per unit and Qt is the quantity of diamond rings offered for sale by “Tiffany". Similarly, Diamond Corporation charges a price, Pa, for the inputs in £ per unit and Qa is the quantity of inputs sold by Diamond Corporation. a) Derive the profit-maximising price and output for both firms, assuming that the two monopolists act as independent profit-maximising companies. Calculate profits of each firm. Use a clear diagram to illustrate your answers to explain your calculations. b) Now assume that the two firms merge. Calculate the post-merger profit-maximising price and sales for diamond rings. Calculate the joint profits of the two firms and the price charged to consumers. Use a clear diagram to illustrate your answers to explain your calculations. c) What is the effect of the merger on final consumer surplus? If you are now advising the government on whether to prevent the merger, what would your advice be, and why?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:"Tiffany" is a retailer monopolist who makes a unique product called the "diamond ring" that
requires exactly one diamond as input, which is sold by a wholesaler monopolist, the
"Diamond Corporation". Diamond Corporation faces a marginal cost of £60 per unit of input
(this is also the firm's average cost). Assume that "Tiffany" faces the following inverse
demand curve for diamond rings:
Pt
320 – Qt
where Pt is the price of red diamond rings in pounds per unit and Qt is the quantity of
diamond rings offered for sale by "Tiffany". Similarly, Diamond Corporation charges a
price, Pa, for the inputs in £ per unit and Qa is the quantity of inputs sold by Diamond
Corporation.
a) Derive the profit-maximising price and output for both firms, assuming that the two
monopolists act as independent profit-maximising companies. Calculate profits of each
firm. Use a clear diagram to illustrate your answers to explain your calculations.
b) Now assume that the two firms merge. Calculate the post-merger profit-maximising price
and sales for diamond rings. Calculate the joint profits of the two firms and the price
charged to consumers. Use a clear diagram to illustrate your answers to explain your
calculations.
c) What is the effect of the merger on final consumer surplus? If you are now advising the
government on whether to prevent the merger, what would your advice be, and why?
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