Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

CHAP. 11] RECENT AND ADVANCED TOPICS IN MARKET STRUCTURE 271
the clock) sold by the marketing division of the firm are, respectively,
Qm ¼ 160 10Pm or
Pm ¼ 16 0:1Qm and
MRm ¼ 16
0:2Qm
The marginal cost functions of the production and marketing divisions of the firm are, respectively
MCp ¼ 3 þ 0:1Qp
MCm ¼ 1 þ 0:1Qm
Draw a figure showing (1) the firm’s best level of output and price for the finished product (the clock)
and (2) the transfer price and output of the intermediate product (the moving parts of the clock).
See Figure 11-7.
and
($)
16
MC = MC p + MC m
13
10
6
4
3
P m
Fig. 11-7
E m
MC p
MC m D m
D p =MR p = P
E t
p
1
MR m
0 30 60 Q
In the figure, MC, the marginal cost of the firm, is equal to the vertical summation of MCp and MCm, the marginal
cost curves of the production and the marketing divisions of the firm, respectively. Dm is the external demand for
the final product faced by the marketing division of the firm, and MRm is the corresponding marginal revenue curve.
The firm’s best level of output of the final product is 30 units and is given by point Em, at which MRm ¼ MC,
so that Pm ¼ $13. Since the production of each unit of the final product requires one unit of the intermediate
product, the transfer price for the intermediate product, Pt, is set equal to MCp at Qp ¼ 30. Thus, Pt ¼ $6. With
Dp ¼ MRp ¼ Pt ¼ MCp ¼ $6 at Qp ¼ 30 (see point Ep), Qp ¼ 30 is the best level of output of the intermediate
product for the production division.