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Problem (Vertical Merger-with fixed proportions): Consider a monopolistic manufacturer that currently sells its product through a competitive retailer. The market demand is P= 100-Q. As separate firms, the manufacturer's cost is MCm=ATCm =5, and the retail service cost is MCr=ATCr=1. If the manufacturer and the retailer vertically merged, the combined costs of manufacturing and retailing would be reduced to MCv1 = ATCv1= 4. If the firms vertically merged, then (compared to the separate firm situation),


A. what would be the change in consumer surplus, producer surplus, and total surplus in dollar values?
B. should this vertical merger be allowed (briefly, why)?

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Kristelle Balando
Kristelle BalandoLv10
29 Sep 2019

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Related questions

1. (12 points) Suppose a typical used car buyer is willing to pay $6000 dollars for a low-quality used car (Lemon), and $14,000 for a high-quality car (Plum). Also, suppose the market supply of Plums is given by QP = -60 +.01P and the market supply of Lemons is given by QL = -20 +.01 P. Let the typical buyer’s belief that a car of unknown quality is a Plum = z, so (1-z) is the probability that a car of unknown quality is a Lemon.

Assume that buyers are risk-neutral so that the price a buyer will offer for a car of unknown quality is given by:

P = z($14,000) + (1-z)($6000). Therefore P = $6000 + $8000z.


a) (8 points) State the equilibrium condition in this market.

z = QP/(QP + QL)















b) (4 points) Determine the two values of z that lead to a market equilibrium. .

z = 0

z = .252. (16 pointsSuppose a manufacturer is a monopoly. This manufacturer produces a good at MC = 8 and sells it to a retailer. The retailer is also a monopoly, and it sells the good bought from the manufacturer to consumers. The retailer has no additional costs other than the price they pay to the manufacturer. The retailer faces a demand curve P = 200 –4Q, where Q is the number of units sold.

a) What price will the manufacturer charge to the retailer?

PM = 104






b) What price will the retailer charge to the consumers?

PR = 152







c) If the two firms merged, what would be the price charged?

P = 104







d) If the two firms merged into a single firm, how much profit would the firm make?

Î = 2304







e) How much profit would the two firms make if they do not merge?

Î M = 1152

Î R = 576

Total Î = 1728





3. (8 points) Consider the case of a manufacturer (upstream firm) who sells a product to a retailer (downstream firm). For each of the following four possible situations carefully explain under which circumstances there is an incentive for the firms to vertically integrate. (You may assume the cost of vertical integration is zero).

Both firms are perfectly competitive

NO






Both firms are monopolies

YES






The manufacturer is perfectly competitive and the retailer is a monopoly

NO







The manufacturer is a monopoly and the retailer is perfectly competitive.

YES If the Retailer has a variable proportions production function. Otherwise, NO.



1.

A consultant has advised Consolidated Fish, Inc., a perfectly competitive firm, that it should cut back its production in order to increase its profits. We can conclude from this that

CF's total costs must be greater than its total revenues.

CF's marginal cost must be greater than the price of its product.

CF's costs are increasing at a rate less than its revenues.

fixed costs are not being covered and CF should shut down.

2.

If marginal cost is equal to marginal revenue

the firm should hold output constant.

the firm should expand output.

there is no way to determine if the firm should expand output, contract output, or hold output constant.

the firm should contract output.

3.

Which statement is true?

The minimum point on the firm's marginal cost curve is the shutdown point.

The minimum point on the firm's average variable cost curve is the shutdown point.

The minimum point on the firm's average total cost curve is the shutdown point.

The minimum point on the firm's marginal cost curve is the break-even point.

4.

As output expands beyond the break-even point, the vertical distance between the AVC and ATC will

remain constant.

get smaller.

get larger.

5.

Total revenue divided by output equals

average variable cost.

marginal cost.

price.

average total cost.

6.

A monopoly firm selling mustache wax to vain men in a small town is currently maximizing profits by charging a price of $5. It follows that the marginal cost of mustache wax

is equal to $5.

is greater than $5.

is less than $5.

None of these choices are true.

7.

A firm can sell 14 units at $18, but to sell 15 units, the firm must cut the price to $17. The marginal revenue derived from selling the 15th unit is

-$18

$3

$17

0

8.

If total revenue is increasing as output is rising, then

marginal revenue must be greater than zero.

marginal revenue must be less than zero.

marginal revenue must be equal to zero.

price must be increasing.

9.

Firms that had virtual monopolies, that is control over at least 80 percent of industry production, because of control over an essential resource include all of the following except

the DeBeers Diamond Company.

the Standard Oil Company.

the Ford Motor Company.

the International Nickel Company.

10.

Which statement is true?

None of these statements are true.

Most natural monopolies are government regulated or government owned.

All monopolies are bad.

All monopolies are good.

11.

Which is the most accurate statement?

There are virtually no oligopolies in the U.S.

The most important aspect of oligopoly is product differentiation.

There are a whole range of oligopolistic models, from a cartel to cutthroat competition.

An oligopolistic industry cannot have more than five firms

12.

Oligopolists have more control over prices than monopolistic competitors because

their prices are always set by the government.

since an oligopolist is the only competitor in the market, setting prices is no problem.

they can legally collude whereas monopolistic competitors may not.

with fewer competitors, they are able to monitor and determine their own prices much easier.

13.

The definition of monopolistic competition differs from that of perfect competition

in neither the number of firms nor the type of product.

in both the number of firms and the type of product.

with respect to the type of product.

with respect to the number of firms in the industry.

14.

The typical monopolistic competitor

may compete on the basis of physical differences, convenience, service, and ambience.

always competes on the basis of producing a product that is physically different from those of its competitors.

never uses price discrimination.

is a large firm.

15.

Which statement is true?

The monopolistic competitor may make a profit in the long run.

The monopolistic competitor has a perfectly elastic demand curve.

None of these statements are true.

The monopolistic competitor operates at the minimum point of her ATC curve.

16.

Which statement is true about the monopolistic competitor in the long run?

It will be breaking even.

It will be making a profit.

It may be making a profit or taking a loss.

It will be taking a loss.

17.

Which statement is true?

Most monopolistic competitors are large firms.

Monopolistic competitors produce goods or services for which there are no close substitutes.

None of these statements are true.

Monopolistic competitors usually operate at the minimum point of their average total cost curves.

18.

Which statement is false?

As the price of a good rises the consumer surplus decreases.

A person would maximize her total utility when she had no consumer surplus.

We will consume a service when its marginal utility is equal to its price.

A product's utility to a buyer is measured by how much the buyer is willing to pay for it.

1.
A channel of distribution:
A) is any series of firms or individuals who participate in the flow of goods and services from producer to consumer or final user.
B) is only needed when products must be stored.
C) must include one or more intermediaries.
D) is only needed when products are sold indirectly.
2.
Which of the following statements about Place decisions is True?
A) Product classes are not related to Place objectives.
B) The product life cycle is not related to Place objectives.
C) Place decisions are short-term decisions that are easy to change.
D) Different market segments may require separate Place arrangements.
3.
Direct _____ involves personal sales contact between a representative of the company and an individual consumer.
A) marketing
B) selling
C) distribution
D) servicing
4.
A manufacturer prefers to produce and ship in large quantities to take advantage of economies of scale. Final consumers often want to purchase in small quantities. This difference between the producer and consumer is a:
A) Discrepancy of assortment.
B) Discrepancy of quantity.
C) Regrouping activity.
D) Discrepancy adjustment
5.
Which of the following best illustrates adjusting "discrepancies of assortment?"
A) General Motors makes Hummer for one product-market and Chevrolet for another product-market.
B) A hardware store sells all the hardware items wanted by most people.
C) Over 310 million U.S. consumers are served by around 330,000 manufacturers.
D) RCA sold more than 2,000,000 TVs last year
6.
Small farmers in the mountains of Peru pick coffee beans by hand, obtaining only a bucket a day. Then they sell them to buyers who put the beans in large bags to be shipped to processors. This regrouping activity is called:
A) Assorting
B) Wholesaling
C) Bulk-breaking
D) Accumulating
7.
Costco is a warehouse store that sells groceries, household items, and business products. Purchase quantities tend to be larger than in traditional stores that serve final consumers. For example, soft drinks are only sold in 24-can cases, not in 6-packs. Coffee is sold in 3-pound cans instead of one-pound foil packs. Which regrouping activity is Costco shifting to the consumer?
A) Accumulating.
B) Adjusting discrepancies.
C) Assorting.
D) Bulk-breaking.
8.
_____ means separating products into grades and qualities desired by different target markets.A) B) C) D)
A) Bulk-breaking
B) Sorting
C) Accumulating
D) Assorting
9.
A wine producer wants a supermarket manager to display its wines in a desirable end-of-aisle location, but the supermarket manager refuses to give that valuable real estate to this producer. This is an example of __________ conflict.
A) contractual
B) vertical
C) corporate
D) horizontal
10.
A local TV retailer hires knowledgeable salespeople to explain the differences among its models to customers, but a nearby discount store with very few sales staff sells the same TVs at a lower price. This is an example of __________ conflict.
A) horizontal
B) traditional
C) vertical
D) contractual
11.
Yukon Sportswear, a manufacturer of textile products, bought out the wholesaler that had been handling its distribution in Canada. This is an example of:
A) dual distribution.
B) reverse distribution.
C) a contractual channel system.
D) vertical integration.
12.
______________ means selling a product through only one wholesaler or retailer in a particular geographic area.
A) Exclusive distribution
B) Direct distribution
C) Intensive distribution
D) Multichannel distribution
13.
_____ means selling the right to use some process, trademark, patent, or other right for a fee or royalty.
A) Licensing
B) Management contracting
C) Joint venturing
D) Exporting
14.
Logistics, or physical distribution, is the ________________ part of the marketing mix.
A) Place
B) Production
C) Promotion
D) Product
15.
Physical distribution customer service level means all of the following EXCEPT:
A) Honda wants enough bumpers to build cars that day.
B) A vacationer wants Avis to have his rental car clean and ready when he arrives at the rental car counter.
C) Sears' shirts are priced at a fair value.
D) McDonald's has enough large cups so that customers can buy the larger size drinks which are on sale.
16.
The right physical distribution system should be based primarily on
A) the desired customer service level.
B) how customers store the product.
C) the physical characteristics of the product.
D) what is the lowest cost method of transportation for the product.
17.
The "total cost approach" to physical distribution management:
A) seeks to eliminate the storing function.
B) seeks to minimize the cost of transportation.
C) might suggest a high-cost transporting mode if storing costs could be reduced enough to lower total distribution costs.
D) ignores inventory carrying costs.
18.
Just-in-time (JIT) delivery:
A) Increases physical distribution costs for business customers.
B) Requires that a supplier be able to respond to the customer's production schedule.
C) Usually does not require e-commerce order systems and computer networks.
D) Means that deliveries are larger and less frequent.
19.
A _____ is the complete set of firms, facilities, and logistics activities that are involved in procuring materials, transforming them into intermediate or finished products, and distributing them to customers.
A) supply chain
B) physical distribution group
C) logistics partnership
D) just-in time group
20.
Which of the following products would have the lowest transporting costs as a percentage of the selling price?
A) Electronic equipment.
B) Chemicals and plastics.
C) Pharmaceuticals.
D) Sand and gravel.
21.
Which of the following statements about transporting by rail is True?
A) Rail transportation is the slowest mode of transportation.
B) Rail transportation is the least expensive mode of transportation.
C) Rail transportation is good for long-distance transportation of heavy, bulky items.
D) Railroads are most efficient at handling less-than-carload (LCL) shipments
22.
Regarding transporting by truck:
A) Trucks are best for moving large quantities of goods long distances.
B) Trucks are a very low cost mode of transportation.
C) Trucks are not reliable in meeting delivery schedules.
D) Trucks tend to provide fast delivery.
23.
Products that require a high frequency of scheduled shipments would be least suited to travel by
A) truck.
B) rail.
C) air.
D) water.
24.
In spite of high cost, high value, low-weight goods like high-fashion clothing and parts for the electronic industry are often shipped long distances by ____
A) rail.
B) water.
C) air.
D) pipeline.
25.
Air express companies place many small packages into specially designed cylinders that conform to the interior dimensions of a cargo airplane. This practice protects the smaller packages and helps to reduce distribution costs. The air express companies are practicing:
A) Containerization.
B) Piggybacking.
C) Freight forwarding.
D) Cylinderization.
26.
The railroad service which picks up truck trailers at a producer's location, loads them onto rail flatcars, hauls them close to the customer, and then delivers them to the buyer's door is:
A) truck service.
B) fast freight.
C) trailer service.
D) piggyback service.
27.
Inventory refers to
A) the amount of goods being stored.
B) minimizing storage costs.
C) the amount of goods being sold.
D) the marketing function of holding goods.
28.
When the manager of a local electronics store decides to offer its customers a gift-wrapping service for the holidays, this is a decision about:
A) Product
B) Place
C) Promotion
D) Price
29.
When the manager of a RadioShack electronics store decides to accept American Express credit cards from its customers, this is a decision about:
A) Product
B) Place
C) Promotion
D) Price
30.
Limited-line storesA) B) C) D)
A) specialize in certain lines of related products rather than a wide assortment.
B) carry anything they can sell in reasonable volume.
C) are a type of unconventional general store.
D) are larger stores that are organized into many separate departments and offer many product lines.
31.
Specialty shops generally:
A) want to be known for the distinctiveness of their product assortment and the special services they offer.
B) sell homogeneous shopping products.
C) are very good at speeding turnover.
D) carry complete lines--like department stores.
32.
The ____________ says that retailers should offer low prices to get faster turnover and greater sales volumes by appealing to larger markets.
A) Wheel of retailing theory
B) Production concept
C) Mass-merchandising concept
D) Sales concept
33.
A retail store that averages about $17 million in sales annually and specializes in groceries--with self-service and large assortments is a:
A) mass-merchandiser.
B) specialty shop.
C) convenience food store.
D) supermarket.
34.
________ offer

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