Problem for Transfer Pricing: To be Discussed in Class with Students Leading the Discussion (so be prepared)
The market demand in the downstream market for Acme's product is
PD = 100 ? 2QD
where PD is the price of a unit of the downstream product and QD is the number of units of the downstream product demanded at that price.
The total cost of Acme's downstream plant (TCD) exclusive of the cost of the upstream input is
TCD = 10 + 20QD + 2QD2
where QD is the number of units produced by Acme's downstream division.
Acme has an upstream division that provides them with an exclusive input. No other firm produces this product and no other firm demands this product. It takes one of the upstream product to produce one unit of the downstream product. The upstream firm's total cost (TCU) is
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