Firms and markets often co-exist. By interacting in a market, a firm can increase its profit compared to only conducting internal transactions. Figure 1, provided in the answer booklet, illustrates the situation for a firm with two divisions. The firm's upstream division incurs a marginal cost " when producing some good that can be used as an input by the downstream division. The upstream division can also sell its production in an external market. The firm's downstream division has a marginal revenue ! when selling to end-consumers. This downstream division can purchase its input requirement from the upstream division and suppliers in the external market. The market price is .

Illustrate in Figure 1 the firm's profit when its divisions are allowed to buy and sell in the external market.

Illustrate in Figure 2 the firm's profit when its divisions are allowed to buy and sell in the external market.