Suppose that the inverse demand for a downstream firm is by P = 150 - Q.Its upstream division produces a critical input with costs of C_U(Q_d) = 5(Q_d )².The downstream firm's cost is C_d(Q) = 10Q.When there is no external market for the downstream firm's critical input, the downstream firm should produce

Question

Quizplus · Accepted Answer

The downstream firm maximizes profit by setting marginal revenue equal to marginal cost. The marginal revenue is derived from the inverse demand function, and the total marginal cost includes both the upstream and downstream costs. Solving for Q gives approximately 11.67 units.

Suppose That the Inverse Demand for a Downstream Firm Is