Reindeer fur boots is a traditional winter footwear of indigenous peoples of the Russian Arctic region, where they are calledunty, which means shoes in the Evenk language. Traditionally homemade, they became popular among arctic explorers and later aviators. This industry took a hit in the 1990s due to a drop in demand from the military as well as invention of artificial materials with superior insulating properties. As of now, Cupid Ltd, a Yakutsk-based enterprise, is the only company capable of producing reindeer fur boots at commercial scale.

Currently, Cupid Ltd sells 10,000 pairs of boots a year at $50 each, and the marginal cost of producing each pair is $10. All of its sales are in Yakutsk and the nearby region.

A former classmate of yours, Mr. Vixen, believes that increased incidences of cold and snowy weather in the Continental U.S. has created demand for reindeer fur boots. He has conducted a study and is confident that the U.S. demand is well described by the following linear relation:

Q=95,000500P

whereQis yearly demand (in pairs of boots) andP

is price (in dollars). He also says that the cost of shipping is negligible, and so his marginal cost would only be the price he pays for the boots. He asks you to help him with pricing decisions.

When Mr. Vixen reaches out to Cupid Ltd to negotiate shipping, he is being told that $50 a pair is the best price they can offer, because they believe it is unfair if a foreign entrepreneur has to pay less than local customers. On the other hand, they are ready to supply you with a virtually unlimited amount of boots at this price.

A)What price would you recommend Mr. Vixen to charge for each pair, and how many pairs would he sell every year?

B)What would be Mr. Vixen's profit in this case? What profit will Cupid Ltd make on its deal with Mr. Vixen? (Do not include the profit from selling in Yakutsk.)

C)Cupid Ltd has been taken over by an oligarch, a former world-famous ballet dancer Rudolph Dasherov. He reaches out to you to assure that the deal you had signed can continue. However, given your earlier interest in lowering the purchase price, he is ready to sell you the reindeer fur boots at their marginal cost $10 (and again, as many as you wish to buy) in exchange for an annual transfer of $1.5M. Would you advise Mr. Vixen to agree to such a deal? What would be his profit in this case?

D)Is Cupid Ltd better off with the deal offered in (c) than with the original deal? Is the industry (Mr. Vixen plus Cupid Ltd) better off? Explain what economic problem this deal solved or failed to solve.

E)Before you have communicated your decision, Mr. Dasherov has reached out to you and apologized, saying that he would only be able to supply as many pairs of boots as you were buying before he took over Cupid Ltd, but not more. He is happy to honor both the original deal and his new offer, with this new caveat. Would you advise Mr. Vixen to choose the new deal in this case? Explain why this deal solves or fails to solve the economic problem you identified in part (d).