Firm A and and Firm B decide to enter into a long-term contract where Firm...
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Firm A and and Firm B decide to enter into a long-term contract where Firm B would supply inputs to Firm A at a specified prices and volume each year. Before signing a contract, Firm A is trying to decide how long the contract should be. Firm A estimates that each year the contract covers saves Firm A $1,400 in bargaining and opportunism costs. However, each year the contract covers also requires more legal fees. Firm A estimates that the number of hours it will need from lawyers, L, has a functional relationship with the number of years on the contract so that L = Y2 + 3Y where Y is the number of years for the contract.
If Firm A's lawyers charge $180 per hour, how long should the contract be? (3 points)
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