"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?

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
icon
Related questions
Question
"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?
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?
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 3 steps with 3 images

Blurred answer
Knowledge Booster
Monopoly
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:
9780190931919
Author:
NEWNAN
Publisher:
Oxford University Press
Principles of Economics (12th Edition)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education