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11. Consider two independent firms, BU1 and BU2, which initially transact with each other through spot market transactions in a competitive market. In a typical
11. Consider two independent firms, BU1 and BU2, which initially transact with each other through spot market transactions in a competitive market. In a typical year, BU1 incurs total costs of $2 million in producing goods that BU2 buys. BU2 would be willing to pay $7.5 million for these goods. The two businesses then decide to enter into an exclusive long-term contract. Due to lower sales and marketing expenses, the total costs incurred by BU1 under the long-term contract fall to $1.5 million. The better product quality resulting from closer cooperation between the two businesses increases the amount BU2 is willing to pay to $9 million. What is the synergy created by the exclusive long-term contract? a. $7.5 million b. $6 million c. $3 million d. \$1.5 million e. $2 million
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