Problem Set 4 2016 - Stanford University Department of...

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Stanford University Department of Management Science and Engineering MS&E 241 Economic Analysis Winter 2016 Problem Set 4 Due Date: 02/03/16 In class Problem 1 The consumer demand for a product is given by p = 1000 − 30lnQ . However, the price that the consumer pays is really the sum of two prices, one price H set by a hardware manufacturer and one price S set by a software manufacturer. So another way of writing the demand curve is H + S = 1000 − 30lnQ . Revenue for the hardware firm is thus HQ ; for the software firm SQ . The hardware manufacturer has marginal costs of 30 per unit while the software firm has marginal costs of 0 per unit. a) Assume that the two firms price optimally and are going to choosing prices simultaneously. What will the final prices be? b) Assume that the hardware and software firms merged. After the merger, how does the profit-maximizing price compare to the sum of the individually optimal prices? c) Does the merger increase/decrease the firms’ profit? By how much?
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