Chapter 12 Pricing Practices

90a firm has two semiautonomous divisions production

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90.A firm has two semiautonomous divisions: production and marketing. The production division manufactures a product that is purchased and then resold by the marketing division. The marginal cost functions for the production division and for the value added by the marketing division are defined below. MC P = 100 + 6 Q MC M = 4 Q The demand function for the product is: QD = 120 – 0.20 P Page 15
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(i) Assume that there is no external market for the output of the production division. How many units should be produced and what transfer price should be paid to the production division by the marketing division? (ii) Assume that the external market for the output of the production division is perfectly competitive and that the market price is $292. How many units should be produced by the production division, how many should be purchased by the marketing division, what transfer price should be paid to the production division by the marketing division, and what price should be charged for the product by the marketing division? 91.A firm has two semiautonomous divisions: production and marketing. The production division manufactures a product that is purchased and then resold by the marketing division. The marginal cost functions for the production division and for the value added by the marketing division are defined below. MC P = 2 Q MC M = Q The demand function for the product is: QD = 100 – P (i) Assume that there is no external market for the output of the production division. How many units should be produced and what transfer price should be paid to the production division by the marketing division? (ii) Assume that the external market for the output of the production division is perfectly competitive and that the market price is $52. How many units should be produced by the production division, how many should be purchased by the marketing division, what transfer price should be paid to the production division by the marketing division, and what price should be charged for the product by the marketing division? Page 16
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Answer Key Page 17
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86.For levels of output where the marginal revenue for both products is nonnegative, the firm's marginal revenue function is obtained by vertically summing the two individual marginal revenue functions as follows: P A = 100 – 0.25 Q A so MR A = 100 – 0.50 Q A Page 18
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P B = 50 – 0.50 Q B so MR B = 50 – Q B MR T = MR A + MR B = 100 – 0.50 Q + 50 – Q = 150 – 1.50 Q For levels of output where the marginal revenue for one product is negative, the firm's marginal revenue function is equal to the nonnegative marginal revenue function. If output exceeds Q = 50, then MR B is negative so the firm's marginal revenue function is equal to MR A .
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