Question
Hana Ltd is a New Zealand-based publisher specializing in high-quality Maori language resources to schools and other educational environments. As such, it happens to be
Hana Ltd is a New Zealand-based publisher specializing in high-quality Maori language resources to schools and other educational environments. As such, it happens to be a monopoly provider of travel guides to world cities written in Maori. They estimate the monthly demand for these travel guides to be Q = 1,000 - 50P, where P is the price in New Zealand dollars (NZ$). The marginal cost of producing one book is NZ$8. Problem 7a) (5 points) What is the optimal price Hana Ltd should set? How many travel guides would it sell? What would be its profit? Air New Zealand has conducted a study and realized that 1% of the buyers of Maori-language travel guides go on to book a trip with their company, each of which on average brings them NZ$400 of profit. In other words, a typical buyer of a Maori-language travel guide brings Air New Zealand an expected profit of NZ$4. They are sure that this is a true causal effect, not just a coincidence. In the light of this study, they are considering acquiring Hana Ltd. Problem 7b) (3 points) Explain, what economic problem would such a merger solve. Problem 7c) (7 points) If the merger goes through, how should the merged company price the travel guides? How many would it sell? Assume that the marginal cost is still NZ$8. Problem 7d) (5 points) Now suppose the merger does not go through, because the New Zealand government, wary of Air New Zealand acquiring businesses outside its core competency, prohibits such a merger. Could you suggest a contract that the two companies could sign that would make both of them better off? (Note: It is not required to solve for a profit-maximizing contract here; all you need to do is to use your knowledge to suggest a simple contract that would increase the profits of both companies.)
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