Double Marginalization

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 plus a bundle of inputs.
Toyota can obtain this bundle of inputs at a (constant) cost of $6.

Suppose first that Michelin and Toyota are just two departments within the same vertically
integrated monopoly (Firm V).
(a) What would be the marginal cost of car production for this vertically integrated Firm V?
(b) What price would Firm V firm charge for cars and how many cars would it produce?
(c) Calculate Firm V’s profit and consumer surplus under this market structure.

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