Firm A invents a new product and obtains a patent for it. It calls the product "Asky". Because of the patent, only Firm A can produce and sell Asky. Firm A plans to sell 1,000 units of Asky at the price of $500 per unit. The marginal cost of producing Asky is constant and equal to $200. Additionally, Firm A incurs a one-time start-up cost of advertising of $10,000. Firm A has agreed to outsource the transportation of Asky to the marketplace to Firm B. Firm A has agreed to pay a transportation cost of $100 per unit to firm B. Firm B's marginal cost to transport a unit of Asky is zero but must purchase a highly customized van worth $50,000 to commence activity. The van has no resale value. 

a) (2 point) What is Firm A's relationship-specific investment (assuming firm A's advertising is not specific to its business with firm B)? 

Hint: RSI is the portion of your investment that you are not able to recover. 

b) (1 point) What is Firm B's relationship-specific investment? 

c) (2 points) Assume Firm A and B are doing business on the agreed terms. What is Firm A's rent (profit)? What is Firm B's rent (profit)? 

d) (3 points) If Firm A's agreement with Firm B falls through, Firm A's second-best option is to partner with Firm C. Firm C transports Asky at a price of $150 per unit. What is Firm A's quasi-rent? 

e) (3 points) Firm B's second-best alternative is to stop transporting Asky. What is Firm B's quasi-rent? 

f) (1 point) Whose bargaining position is stronger? Why? 

g) (2 points) Suppose Firm A's agreement with Firm B falls through. Firm A asks Firm B to accept $50 per unit of Asky transported, or else it quits working with Firm B. Will Firm B accept Firm A's offer? 

h) (3 points) Is there a hold-up in this case, and is the outcome inefficient? 

i) (4 points) How much does Firm A need to pay Firm B to ensure that A's bargaining positions are the same? (i) (5 points) Intuitively, how would your answer to the question (i) change if the resale value of the Firm B's van were $20,000, rather than zero? Would Firm A's pay to Firm B that equalizes A's bargaining positions fall or rise and why? Provide an intuitive answer, without any calculations. 

j) (4 points) What if Firm B does not trust Firm A? Firm B thinks that as soon as it purchases the van, Firm A will reduce the payment to him to $40 per unit transported. Would B still buy the van? Does this hold-up problem lead to an inefficient outcome?