In: Economics
Suppose that Michelin is the only producer of tires and Toyota the only producer of cars. The demand function for cars is given by Q = 40 − 4P. Michelin's (constant) cost of production for a set of five tires is 3. The production of one car requires a set of five tires and a bundle of inputs, which Toyota can obtain at a price of 6. Suppose first that Michelin and Toyota are just two departments within the same firm.
(a) What price would the firm charge for cars and how many cars would it produce? Suppose now that Michelin and Toyota are separate firms. Michelin quotes a price w for a set of five tires and Toyota decides how many sets to buy at that price.
(b) What price will Michelin set? How many cars will Toyota sell and at what price?
(c) Are consumers better off when Michelin and Toyota are an integrated firm [Part (a)] or when they are separate firms [Part (b)]?