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Suppose that a paper mill feeds a downstream box mill. For the downstream mill, the marginal protability of producing boxes declines with volume. For example,
Suppose that a paper mill \"feeds" a downstream box mill. For the downstream mill, the marginal protability of producing boxes declines with volume. For example, the rst unit of boxes increases earnings by $60, the second by $54, the third by $43, and so on, until the tenth unit increases prot by just $6. The cost the upstream mill incurs for producing enough paper (one \"unit" of paper) to make one unit of boxes is $6.50. Assume the two mills operate as separate prot centers, and the paper mill sets the price of paper. It follows that the marginal protability of boxes represents the highest price that the box division would be willing to par,r the paper division For boxes" Furthermore, assume that xed costs are $0 for the paper mill. The following table summarizes the quantity, total revenue, and marginal costs from the perspecb've of the paper mill for selling paper to the box mill at various prices. In the following table, ll in the marginal revenue, total cost, and total prot for the paper mill when selling paper to the box mill at each given price. Total Marginal Price Quantity Revenue Marginal revenue Total Cost Cost Prot (Marginal Protability to {Unfb' of Paper the Box ""0 equivalent to ($1? One BOX) (5') (3) ($11 ('5) {$1} $60 1 $60 $6.50 $ $ $6.50 $54 2 $108 $ $ Fa $5.50 $40 3 $144 $ $ $ $5.50 $42 4 $168 $ $ 3 $6.50 $35 5 $130 $ $ $ $6.50 $30 5 $130 $ $ Fa $5.50 $24 ?' $168 $ $ $ $5.50 $18 8 $144 $ $ 3 $6.50 $12 9 $108 $ $ $ $6.50 $6 10 $60 $ $ If the paper mill sets the price of paper to sell to the box millr it will set a price of V and sell V units of paper to the box mill. Prots will be for the paper mill. Companvwide prots will be . (Hint: Recall that the prices in the table represent the marginal protability of each unit of paper. or box. to the box mill.) Suppose the paper mill is forced to transfer paper to the box mill at marginal cost ($6.50). In this case, the box mill will demand V units of paper. This leads to companywide prots of_
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