Chapter 12 Pricing Practices

When marginal revenue is above 120 only the marginal

Info icon This preview shows pages 20–22. Sign up to view the full content.

View Full Document Right Arrow Icon
below 120. When marginal revenue is above 120, only the marginal revenue function for market A is relevant. Setting the firm's marginal cost function equal to MRS yields: MRS = 160 – 0.5 Q = 20 + 0.20 Q = MC so Q = 200 and MRS = 60 Substituting MRS = 60 into the marginal revenue function for the two markets yields Q A = 140 and Q B = 60. Page 20
Image of page 20

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Substituting these quantities into the demand functions yields P A = 130 and P B = 90. 90.(i) In the absence of an external market, production is determined by vertically summing the two marginal cost functions and setting the sum ( MCS ) equal to marginal revenue: P = 600 – 5 Q so MR = 600 – 10 Q MCS = MC P + MC M = 100 + 6 Q + 4 Q = 100 + 10 Q MR = 600 – 10 Q = 100 + 10 Q = MCS so Q = 25 at P = 475 The transfer price is set equal to the marginal cost of manufacturing the optimal level of output: P T = MC P = 100 + (6)(25) = 250 (ii) The production division should manufacture the quantity that sets its marginal cost equal to the competitive price: P = 292 = 100 + 6 Q so Q P = 32 The transfer price is equal to the competitive market price and so: MCS = P T + MC M = 292 + 4 Q Finally, MCS is set equal to marginal revenue to determine the number of units that will be purchased by the marketing division and the price at which they will be sold: MR = 600 – 10 Q = 292 + 4 Q = MCS and Q M = 22 at P = 490 91.(i) In the absence of an external market, production is determined by vertically summing the two marginal cost functions and setting the sum ( MCS ) equal to marginal revenue: P = 100 – Q so MR = 100 – 2 Q MCS = MC P + MC M = 2 Q + Q = 3 Q MR = 100 – 2 Q = 3 Q = MCS so Q = 20 at P = 80 The transfer price is set equal to the marginal cost of manufacturing the optimal level of output: P T = MC P = (2)(20) = 40 Page 21
Image of page 21
(ii) The production division should manufacture the quantity that sets its marginal cost equal to the competitive price: P = 52 = 2 Q so Q P = 26 The transfer price is equal to the competitive market price and so MCS = P T + MC M = 52 + Q Finally, MCS is set equal to marginal revenue to determine the number of units that will be purchased by the marketing division and the price at which they will be sold: MR = 100 – 2 Q = 52 + Q = MCS and Q M = 16 at P = 84 Page 22
Image of page 22
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern