Q) Why do firms practice transfer pricing? Answer)Students need to provide an explanation of what transfer pricing is and what its fundamental criterion is: to maximise group, not divisional profits. Standard textbook diagrams showing the result that, if the external market is competitive, the transfer price is the competitive market prices Explain how transfer pricing is affected when: Q) There is a competitive external market for the intermediate product. Answer) Standard textbook diagrams showing this with the key result that the transfer price should be based on the marginal cost of the transferred good Q) There is a non-competitive external market for the intermediate product. Answer)Standard textbook diagrams showing this with the key result that the transfer price should be based on the marginal cost of the transferred good