Answer (b).

Firm A manufactures velvet hats and agrees to sell them through two Baltimore retail stores at a wholesale price of $10, making a profit of $6 on each hat. Demand for these hats is Q=30-p. Retailers compete in a Bertrand game.

(a) Is the $10 wholesale price the optimal wholesale price for the manufacturer? If not, what is the optimal wholesale price?

Each retailer (but not firm A itself) can pay $50 to endorse Firm A's hats. Demand for these hats is Q=40-p if endorsed. Note that demand is enhanced as long as one of the retailers pays the endorsement fee.

(b) Will either retailer pay the endorsement fee?