1)The demand for a product is given by P=6600-10Q , where Q is the number of the product sold and P is the price. The total cost of production is
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Question

1)       The demand for a product is given by P=6600-10QQP2MC=2Q

, where is the number of the product sold and is the price. The total cost of production is C(Q)=Q and, therefore, marginal cost

a)     What is the optimal output, price, and profit for the firm, respectively? [4 marks]

 

b)     Now assume there is a re-organisation in the firm that changes the organisational architecture. The firm is divided into two profit centres. One division, the production division, produces the product at a total cost of C(Q)=Q2 and then transfers it to the sales division that faces the firm's demand curve. There are no other costs than the transfer price of the product. The sales division is only allowed to source the product in-house. There is asymmetric information and the production division only decides about the transfer price. The sales division decides the quantity it buys from the production division at the transfer price. Show graphically how to determine the transfer price. Explain the economics of transfer pricing. [4 marks]

 

c)      What is the optimal transfer price, from the perspective of the firm? Calculate the transfer price set by the production division in b). Calculate the resulting profits of each division. [2 marks]

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Step-by-step explanation

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Subject: Business, Economics
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