Assume that Ford Motor Company can produce an automobile at a constant marginal cost of $4,000. The demand for the car in the Rochester area is P = 60,000 - 100Q.
a. What is the profit-maximizing price and quantity? What are the profits from this activity?
b. Now suppose that Ford sells its cars through an independent distributor, Rochester Autos, which has the exclusive right to sell new Fords in the Rochester area. Under the contract, Ford sets the wholesale price, and Rochester Motors selects the quantity to purchase and the retail price. The only cost facing Rochester Motors is the wholesale price of the car. Ford and Rochester Autos both strive to maximize their own profits. What are (1) the wholesale price, (2) the retail price, (3) the quantity sold, and (4) the combined profits of Ford and Rochester Autos?
c. Describe how Ford might use a two-part pricing scheme to eliminate this successive monopoly problem with Rochester Motors. (No calculations are necessary.)