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  3. q2 the final output for a product is comprised of...

Question: q2 the final output for a product is comprised of...

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Q2. The final output for a product is comprised of one unit of input from both a wholesaler and a retailer. There is only one wholesaler but there are two retailers. The wholesaler has marginal cost of c=10. The retailers have marginal costs of 0. Final demand is given by P = a – bQ, where a=100 and b=3. The wholesaler can set a two-part tariff, with a fixed-fee F and a per unit fee w. (15 points)

  1. a)  If the retailers are Bertrand competitors, what is the fixed-fee and w that will maximise profits for the wholesaler? How does this compare to the output and price level of a vertically-integrated firm?

  2. b)  Now assume that the retailers are Cournot competitors. Again the wholesaler sets a fixed-fee and a per-unit charge. What is the output level of the retailers,given that the wholesaler has set a per-unit charge of w? What is the maximum fixed fee F that the retailers would be willing to pay? 


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