Where there is a perfectly competitive external market for a transfer product, the final product division should pay the transfer product division a price:
A) in excess of that at which the transfer product can be obtained from outside suppliers.
B) that is the prevailing, perfectly competitive, external market price.
C) that is less than the transfer product division can obtain in the external market.
D) equal to the marginal cost of the transfer division at the output level where the final product division maximizes profit.
E) equal to the marginal cost of the final product division at the output level where the transfer product division maximizes profit.

Question

Quizplus · Accepted Answer

The final product division should pay the transfer product division a price that is the prevailing, perfectly competitive, external market price. This is because in a perfectly competitive external market, the transfer product can be obtained from outside suppliers at this price. Therefore, the final product division should pay the same price as it would pay to outside suppliers to ensure efficient allocation of resources and minimize transaction costs.

Where There Is a Perfectly Competitive External Market for a Transfer