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Suppose that a car dealer has a local monopoly in selling Volvos. It pays w to Volvo for each car th Show more Suppose that a car dealer has a local monopoly in selling Volvos. It pays w to Volvo for each car that it sells and charges each customer p. The demand curve that the dealer faces is best described by the linear function Q=30-p where the price is in units of thousands of dollars. What is the profit-maximizing price for the dealer to set? At this price how many Volvos will the dealer sell and what will the dealers profit from selling the cars be? Now let us think about how the situation looks from the car manufacturers point of view. If Volvo charges w per car to its dealer calculate how many cars the dealer will buy from Volvo. In other words what is the demand curve facing Volvo? Suppose that it costs Volvo $5000 to produce each car. What is the profit-maximizing choice of w? What will Volvos profits be? What price p will the dealer set and what profit will the dealer earn at Volvos profit-maximizing choice of wholesale price w? Now suppose Volvo operates the dealership and sells directly to its customers. What will be Volvos profit-maximizing price p? What will Volvos profit be? Show less
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