The figure given below represents two monopolists James and Jerry.James produces Good A using the input Good B which is produced by Jerry and has no other variable costs.James is the only consumer of Good B, and the marginal cost incurred by Jerry to produce Good B is zero.DA and DB represent the demand curves for Good A and Good B respectively.MRA and MRB represent the marginal revenue received from Good A and Good B respectively.It takes one unit of A to produce a unit of B.

-Refer to Figure.Which of the following agreements between James and Jerry would be feasible?
A)James pays Jerry an amount above $48 only if Jerry agrees to produce 8 units.
B)James pays Jerry and amount below $24 only if Jerry agrees to produce 8 units.
C)James pays Jerry an amount above $24 only if Jerry agrees to produce 8 units.
D)James pays Jerry an amount below $12 only if Jerry agrees to produce 8 units.

Question

The figure given below represents two monopolists James and Jerry.James produces Good A using the input Good B which is produced by Jerry and has no other variable costs.James is the only consumer of Good B, and the marginal cost incurred by Jerry to produce Good B is zero.DA and DB represent the demand curves for Good A and Good B respectively.MRA and MRB represent the marginal revenue received from Good A and Good B respectively.It takes one unit of A to produce a unit of B.

-Refer to Figure.Which of the following agreements between James and Jerry would be feasible?

-Refer to Figure.Which of the following agreements between James and Jerry would be feasible?
A)James pays Jerry an amount above $48 only if Jerry agrees to produce 8 units. 
B)James pays Jerry and amount below $24 only if Jerry agrees to produce 8 units. 
C)James pays Jerry an amount above $24 only if Jerry agrees to produce 8 units. 
D)James pays Jerry an amount below $12 only if Jerry agrees to produce 8 units.

Quizplus · Accepted Answer

In order for James to maximize profits, he would want Jerry to produce enough Good B to ensure that the marginal cost of producing Good A is equal to the marginal revenue received from selling Good A. In this case, that would be when James produces 4 units of Good A (where MRA = MC = $48) and Jerry produces 8 units of Good B (where MRB = $12). 
Thus, James would be willing to pay Jerry an amount above $24 (the amount Jerry would receive selling 8 units of Good B in the market) only if Jerry agrees to produce 8 units. Therefore, choice C is feasible. 
Choices A, B, and D are not feasible because in each of those scenarios, James would not be able to produce 4 units of Good A at a profit-maximizing quantity (where MRA = MC = $48).

The Figure Given Below Represents Two Monopolists James and Jerry