1. Consider the industry for widgets. This industry is characterized by a vertical relationship between two monopolists [Widget Retailer \"WR\" and Widget Manufacturer \"WM"). Suppose the down- stream market for widgets is characterized by the inverse demand function: P = 100 Q, where P is the market price paid by consumers and Q is the total quantity sold. WR obtains its widgets from the monopoly manufacturer 'WM at a manufacturing price to per widget. WM incurs a cost of .19 10 per unit in making widgets, while WR incurs a cost of .85 per unit in addition to the price m that it has to pay to WM for widgets. (a) What is the equilibrium price to consumers, P, and the equilibrium manufacturing price as, without vertical integration? What is the prot earned by each rm at these prices? [10 marks] (b) Dene the double marginalization phenomenon. Illustrate this phenomenon graphically. [10 marks] (c) Show mathematically that vertical integration increases profits and benets consumers. Illus- trate graphically how vertical integration solves the double marginalization phenomenon. [15 marks] (d) What are the two important assumptions underlying the result in part (c)? Discuss briey the effects of relaxing these assumptions. [15 marks]