Suppose ABC is still a monopolist selling to the two retailers but it now discov

Question

Suppose ABC is still a monopolist selling to the two retailers but it now discovers that if retailers supply customer services, demand shifts to P = 90 – Q. Each retailer can provide the required services at a total cost of $400.

c. ABC decides to implement an RPM agreement with retailers. Under this agreement, what retail price should ABC specify? How many units will retailers sell at this price?

d. Under this RPM agreement, what is the maximum wholesale price that ABC can set? In answering this question, assume that at the RPM price competitive

pressure forces each retailer to offer the required services (i.e., any retailer offering a lower service level loses all its customers).

e. What is the consumer surplus and profits at this wholesale price? Has the RPM agreement improved social welfare?

Explanation / Answer

E)Consumer surplus can be measured in monetary units. It is equal to the difference between the amount of money that a consumer actually pays to buy a certain commodity X and the amount he would be willing to pay for this quantity.

It is measured using indifference curve.

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