Calculate Demand Function, Transfer Price and Number of Units To Be Produced


A firm has two semi-autonomous 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.

      MCP = 2QP               MCM = QM

The demand function for the final product is QD = 100 – P.  Assume that there is no external market for the output of the production division.  

a)    How many units should be produced?
b)    What transfer price should be paid to the production division by the marketing division?
c)    Now suppose there is a perfectly competitive market for the good produced by the production division and the price is $70 per unit.
       i)    How many units will the marketing division sell to consumers?
      ii)    How many units will the production division produce?
d)     How many units will the production division sell to the external market?


The question belongs to Finance and it is about a scenario where a company’s demand function is given. The number of units to be produced, the transfer price to be paid to the production division, etc have been answered in the solution in detail.

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