# Answer to Question #51394 in Economics of Enterprise for Candy

Question #51394
Write-Right, Inc. is a vertically integrated firm that produces both paper and writing tablets. The demand for tablets is given by: PT = 1.00 - 0.001QT where QT is the quantity of tablets produced. The marginal cost of producing the paper necessary for each tablet is: MC = 0.20 + 0.001QT It costs \$0.10 to make the paper into a writing tablet. If there is no external market for the paper, what transfer price should top management set for the paper?
PT = 1.00 - 0.001QT
MC = 0.20 + 0.001QT
It costs \$0.10 to make the paper into a writing tablet. If there is no external market for the paper, the transfer price can be
found at the point, where P = MC = MR
MR = TR&#039; = (P*Q)&#039; = 1 - 0.002Q
MR = MC, so:
1 - 0.002Q = 0.2 + 0.001Q
0.003Q = 0.8
Q = 0.8/0.003 = 267 units
P = 1 - 0.001*267 = \$0.733
So, top management should set the price P = \$0.733 for the paper.

Need a fast expert's response?

Submit order

and get a quick answer at the best price

for any assignment or question with DETAILED EXPLANATIONS!