Question
Kia Motors manufactures cars that are sold through dealers. The (daily) demand for Kia cars in a certain market is given by D(p) = 30
Kia Motors manufactures cars that are sold through dealers. The (daily) demand for Kia cars in a certain market is given by D(p) = 30 p, and let the (constant) marginal cost of manufacturing a car be: MC = 5 (all prices and costs are expressed in units of thousands of dollars to make these conditions realistic). To begin with, assume that Kia does not own its dealers but instead sells the cars to them at a wholesale price of w. (a) If there is a single dealer with an exclusive right to retail Kia's cars, find the profit-maximizing retail price it will charge, along with the quantity and the dealer's profit-maximizing wholesale price w per car. What are the profit levels of both the manufacturer and the dealer? [10 marks] (b) Kia considers buying the dealer. What would the equilibrium price and profits be if it did undertake both manufacture and retailing of its cars? [10 marks] (c) Define the double marginalization phenomenon. Illustrate this phenomenon graphically using your answers in parts (a) and (b). [10 marks] (d) If, instead, there was perfect competition in retailing of Kia's, at which level would the manufacturer set its wholesale price? [10 marks] (e) Compute Kia's profits at the price in (d), and compare them against profits found in parts (a) and (b)
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