Local fishermen sell their daily catch at the local fish market at a price of €5 per kilo. The production function for village output is
where x is the quantity of bait used each week. Bait is only available from the neighbouring village who charge €10 per day to collect it from the foreshore. The production function for bait is given by
where l represents the number of days spent collecting bait each week.
a. Determine the equilibrium price and quantity of bait where both villages are price takers.
b. If the fishermen dictate the price of bait and the bait collectors are price-takers, determine the new equilibrium price.
c. If the bait collectors act as a monopsonist and the fishermen acts as a price-taker, what will the equilibrium be?