Transfer pricing Consider Figure 5.14, which indicates the marginal costs of production of an intermediate good as well as the marginal cost of marketing the final good. The intermediate

good and the marketing are bundled as a joint product, one-to-one. The demand (average revenue) and the marginal revenue curves are drawn as well.

a What is the profit maximizing level of sales (units of production)?

b What will your firm charge the final customer?

c What is the optimal transfer price that the marketing division will pay for intermediate goods supplied to the marketing division?

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Price Pm=7 P=3 MC MC+MC = MCp MC m -D MR 100 Quantity Figure 5.14 Transfer pricing m