Reference no: EM131426972

Imagine that there are two monopolies: upstream and downstream. The upstream monopoly produces units of wood, x, that it sells for $k each to the downstream monopoly. Its cost of making wood is C(x) = 20x. The downstream monopolist uses the wood to make tables, y, which it sells for $p each. The demand for tables is p = 80 - y. Wood is the only input used by the downstream monopoly. It needs 2 units of wood for each table, so y = x/2 for production. [Hint: think about how this will affect the cost of a table.]

1. Find the following: k, p, y and x.
2. Find the profits of each firm.
3.  Show that if the firms merged, the profits made by the merged firm would be greater that the sum of the profits when they do not merge.
4.  How much would the merger benefit table-consumers? Calculate the change in consumers' surplus due to the merger.