a. Single markup
Manufacturing unit MC=$200, selling and distribution cost Sales unit MC=$150 End user’s consumer demand P=1000-0.01Q. P is the price for each printer and Q is the quantity demanded in the marketplace. The marginal revenue corresponding to the demand is MR=1000-0.02Q. Total marginal cost MC=$200+$150=$350.
The firm maximizes profit when MR=MC. Thus, 1000-0.02Q=350. Q=32500. Substituting Q into the demand equation we find the profit maximizing price, P. Since P=1000-0.01Q, and Q=32500, the profit maximizing price is P=$675. Profit=(P-MC)*Q=(675-350)*32500=$10,562,500.
b. Double mark up – Manufacturing unit charges sales unit the monopoly price.
Manufacturer unit:Sales Unit
P’=$525 (transfer price to sales unit)P=$837.5
Total profit=(Profit Manufacturing unit)+(profit sales unit)
2. Example of transaction cost economics.
Some organizations struggle whether or not to outsource the IT division. The company has two choices for any economic activity: going outside to market or perform the activities in-house. In any case, the cost of the activity is divided into production costs, and transaction costs. Production costs in the case of the in-house division, includes hardware and software, whereas the transaction cost, which are the activities related to implementing the economic activity includes costs related to build the IT team. In the case of outsourcing, the production cost includes all cost the outsourcer incurs in providing the service whereas the transaction cost which typically are incurred by the client, include selection and searching of a specific provider, contract...