2. This question has two parts, please answer both. Part I Consider a manufacturer that sells its product to a retailer who resells it to final consumers. The manufacturer’s marginal cost is zero whereas the retailer’s marginal cost is constant at 1 (that is, each unit that it sells increases the retailer’s total costs by 1). The market has 20 consumers of type A and 40 consumers of type B. Each consumer would like to buy at most one unit. A consumer of type A is willing to pay up to $10 and a consumer of type B is willing to pay up to $5. The manufacturer has the bargaining power to offer a contract to the retailer. The retailer has an alternative profit of $40 and will agree to the manufacturer’s contract as long as the retailer can earn at least $40.
(a) Suppose that the manufacturer can only charge a wholesale price (price per-unit), w. The retailer decides whether to accept or reject the manufacturer’s offer, and then the retailer decides on the price to final consumers. What is the wholesale price that the manufacturer offers? What is the price, quantity and the profits of the manufacturer and the retailer? Is there a
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