Answer to Question #145686 in Economics for Shivani Lohiya

Question

Write-Right, a vertically integrated firm produces both paper and writing tablets. The demand for tables is given by
PT = 1.00 0.001Q
where Q is the quantity of tablets. The marginal cost of producing the paper necessary for tablet is
MCP = 0.20 + 0.001Q
It costs the firm $0.10 to make the paper into a writing tablet. If there is no external market for the paper, what transfer price should top management set for the paper?

Answer 1

If MCP = 0.20 + 0.001Q and PT = 1.00 – 0.001Q, MCP = PT,

$0.20 + 0.001Q = 1.00 – 0.001Q$

Q = 800,

So PT = 1.00 – 0.001Q = 0.2 is a transfer price.