Halifax & Smyth (H&S) is a clothier that specializes in expensive men's suits, and the firm makes the suits from wool fabrics that are woven by one of the firm's divisions. This division is the only source for this material, and H&S uses the optimal transfer price to determine the value of the wool fabric. What happens if the marginal cost of assembling the men's suits increases?
A) The net marginal revenue (NMR) curve for wool fabric shifts upward, and wool (suit) production increases.
B) The net marginal revenue (NMR) curve for wool fabric shifts upward, and wool (suit) production decreases.
C) The net marginal revenue (NMR) curve for wool fabric shifts downward, and wool (suit) production increases.
D) The net marginal revenue (NMR) curve for wool fabric shifts downward, and wool (suit) production decreases.

Question

Quizplus · Accepted Answer

If the marginal cost of assembling the men's suits increases, it means that the cost of producing the suits has increased. This would lead to a decrease in the overall profit margin for H&S. As a result, the optimal transfer price for the wool fabric would decrease, leading to a downward shift in the net marginal revenue (NMR) curve for wool fabric. This would make it less profitable for H&S to produce the suits, and thus, wool (suit) production would decrease.

Halifax & Smyth (H&S) Is a Clothier That Specializes in Expensive