3. ACcountlng proits, taxes, and transter priclng Aa Aa Acme U.S. can sell a car for $17,000. To make one, it must pay $10,500 in wages to its workers. It also pays $3,000 for an engine, which it buys from Acme Mexico. To run its factories long enough to make a car, Acme U.S. must also purchase $800 worth of electricity from an unrelated firm, U.S. Hydroelectric. Assume that Acme Mexico is totally self-sufficient. It purchases no inputs from other firms. It even generates its own electricity. For each engine that it produces, it pays $2,200 in wages to its workers. (Of course, because it is located in Mexico, it actually pays its workers in pesos, the Mexican currency unit. The number used here, 2,200, is the equivalent in dollars of its peso wage payments.) For each car that Acme U.S. sells, this table summarizes the information on the revenue and costs for the three firms. It shows the initial price that Acme U.S. pays Acme Mexico, $3,000 per engine. In some problems, you will be asked to consider how things change if Acme Mexico increases this price to $3,700 per engine Revenue Payments to workers Purchased inputs Engines Electricity Acme U.S. ($) 17,000 10,500 Acme Mexico ($) 3,000 2,200 U.S. Hydroelectric ($) 800 Not applicable Not applicable 3,000 800 For each car that it sells, Acme U.S. earns an accounting profit that is the difference between the price of the car and what it pays for its purchased inputs and labor. Using the costs just outlined, Acme U.S. makes accounting profit on each car that it sells in Suppose that the U.S. government collects a 35% tax on all corporate profit earned in the United States and that the Mexican government collects a 20% tax on all corporate profit earned in Mexico is left over for the After Acme U.S. and Acme Mexico pay taxes in their respective countries, shareholders of Acme Worldwide on each car that Acme U.S. manufactures and sells Continue to assume that the U.S. government collects a 35% tax on all corporate profit earned in the United States and that the Mexican government collects a 20% tax on all corporate profit earned in Mexico Suppose that Acme Worldwide decides to increase the price that Acme U.S. pays Acme Mexico for engines. This price is an example of a transfer price, a price that a multinational corporation uses to transfer goods from one of its companies to another. Because this is not a market price, but a price that is set by Acme Worldwide, it can set any price it wants In particular, suppose that it raises the price for engines from $3,000 to $3,700. This will increase profit in Mexico by $700 and reduce profit in the United States by $700. This reduces the total taxes that Acme Worldwide, including Acme U.S. and Acme Mexico, has to pay on each car that it sells by