Question
Dearborn sells a different product called a DB-1. To make a DB-1, Dearborn needs to buy an AA-1 from Ann Arbor as a component to
Dearborn sells a different product called a DB-1. To make a DB-1, Dearborn needs to buy an AA-1 from Ann Arbor as a component to the finished product. AA-1s are only used to make DB-1s--they have no other purpose. Dearborn is forecasting demand of 500-1000 DB-1s, but Ann Arbor currently only has enough capacity to make 500 AA-1s. Thus, if more than 500 orders for DB-1s come in, Dearborn will be constrained and only able to sell 500. Thus, Dearborn wants Ann Arbor to lease an additional machine capable of making an additional 500 AA-1s. The equipment rental company will charge Ann Arbor $50,000 to lease the machine for the period. If Dearborn is able to get orders for 800 DB-1s, how much of the $50,000 lease should it reimburse Ann Arbor through a transfer payment. Answer in dollars.
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