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Assume an industry with one upstream and one downstream monopoly. The upstream monopoly produces Q, which is sold solely to the downstream monopoly. The downstream monopoly faces the inverse demand curve PR = 1 - Q, where PR is the retail price of Q. further assume that the production of Q exhibits constant marginal costs cQ.
g) Assume that the two monopolies merge. What is the output level and price in equilibrium?
h) Determine the output level, wholesale price, and retail price and deadweight loss before any vertical integration takes place. [Hint: solve this problem backwards, start with the downstream firm, taking the price for the upstream monopoly as given. Then solve the problem for the upstream firm using the demand of the downstream firm]
i) Compare the results you obtained in (a) and (b) using a graph. Show the loss in terms of Consumer Surplus and in terms of Deadweight Loss from Double Marginalization.
Price/Feeder Quantity Demanded Quantity Supplied $300 500 1800 270 600 1700 240 700 1600 210 800 1500 180 1000 1400 150 1100 1300 120 1200 1200 90 1300 1100 60 1400 1000 30 1500 90
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