Where there is a perfectly competitive external market for a transfer product, and the final product division maximizes profit at a lower output level than that of the transfer product division, the transfer products division should sell the quantity Q_T - Q_F of the transfer product in the external market at the prevailing market price.

Question

Quizplus · Accepted Answer

If the final product division maximizes profit at a lower level of output, it means that the marginal cost of producing an additional unit of final product is higher than the market price. This implies that the transfer product division has a comparative advantage in producing the transfer product, as its marginal cost is lower than the market price. Therefore, it makes sense for the transfer product division to sell some of its output in the external market to maximize overall profit. The quantity to sell can be determined by equating the marginal cost of the transfer product to the external market price, which gives the expression Q_T - Q_F.

Where There Is a Perfectly Competitive External Market for a Transfer