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A shoe manufacturer F holds a monopoly on the market. It faces the following demand:
Q= 10 - p
where Q corresponds to millions of pairs of shoes purchased and p the price per pair. The production cast is 2$ a pair.
(a) What is the price proposed by F? How many pain are sold at that price?
The Trade Commission does not approve of this monopolistic Mtuanon. It thus proposes to break the company into two distinct entities. Firm F1, sells the right shoes at Price p1 while firm F2 sells the left shoes at price p2. Demand for the pairs remains the same:
Q = 10 - p1 - p2
The marginal production cost for each shoe is 1$.
(b) Each company maximizes its own profit in taking for granted the price posted by the other firm. Give the expression of p1 as a function of p2. Give also the expression of p1 as a function of p2.
(c) Compute the new equilibrium (price and total quantity of pairs of shoes sold).
(d) Has the decision to break the firm into two increased consumer surplus?
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