Question

Automotive Manufacturing Corp. faces the following demand function for its cars:
P = 55,000 – 200Q

The marginal cost (MC) to manufacture a car is $9,000.

• What will the price be if Automotive Manufacturing Corp. decides to sell the cars by itself? (10 points)
• What will the price be if Automotive Manufacturing Corp. sells its cars through Automotive Distribution LLC, an independent distributor? Note that when Automotive Manufacturing Corp. contracts with Automotive Distribution LLC, both companies face the same demand curve. (10 points)
• Should Automotive Manufacturing Corp. sell the cars by itself or sell them through Automotive Distribution LLC? Why? (10 points)

Answer 1

When the manufacturer itself sells the car, the price will be $32000.

It is given that if the manufacturer hires a distributor company to sell the cars, still the demand function they face is similar as the manufacturer faces. The distributor will add his own share in the total profit. This might lead to increase in price or increase in price for the manufacturer. As the manufacturer will require to pay the distributor to sell the cars in the market. But overall the market price will remain the same, even of distributor is used to sell the cars.

If the manufacturing company it self sells the cars, there will be huge costs like marketing, warehousing, maintenance, and other which the company will need to incur. Basically will have to hire a seperate unit to oversee these activities which will eventually increase the manufacturer's cost. The distributors have a link or connection with the dealers and consumers so it is easy for them to distribute the products. The manufacturer can surely save a massive cost and use the distributor for the selling. The distributor's work is to market the product and make the product available in the market.

So, company can surely choose to take the services of distribution of its cars through the distributor.