The diagram below shows the final product demand for widgets. The production of one widget requires one gadget. A monopolist sells gadgets, and one or more fi rms buys gadgets from the gadget monopolist to produce widgets. Gadgets are produced at constant marginal cost of 20, and widget producers incur no costs beyond what they pay gadget producers.

Q1. Suppose the widget market is competitive, and the gadget manufacturer would incur a fixed cost of 1 to vertically integrate into the production of widgets. Which of the following is true?

a. The gadget producer has no incentive to vertically integrate.

b. The gadget producer will vertically integrate and the widget price will not change.

c. The gadget producer will vertically integrate and the widget price will rise.

d. The gadget producer will vertically integrate and the widget price will fall.

e. None of the above.

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