Where there is a perfectly competitive external market for a transfer product, the profit maximizing condition for the transfer product division is: A) MR_F = MC_F + MC_T B) MR_F = MC_F - MC_T C) MR_T = P_T = MC_T D) MR_T = P_T + MC_T E) MR_F = MC_F = MC_T

Question

Quizplus · Accepted Answer

In a perfectly competitive external market, the transfer product price (P_T) is determined by market forces and fixed for the transfer product division, hence there is no room for profit maximization with respect to the transfer product price. The profit maximizing condition for the transfer product division is therefore solely determined by minimizing the transfer product costs (MC_T), which is given by the marginal rate of substitution between the transfer product and the final product (MR_T = P_T), indicating that the transfer product division should produce the transfer product up to the point where the cost of producing one additional unit of transfer product (MC_T) equals the opportunity cost of using the same resources to produce one fewer unit of final product.

Where There Is a Perfectly Competitive External Market for a Transfer