A vertically integrated firm produces both a specialized computer chip and the consumer toy that uses this chip. No external market exists for the computer chip. The management teams of both divisions receive bonuses that are dependent on the internal profits generated within their respective divisions. The toy division prefers a ____ transfer price, while the computer chip division prefers a ____ transfer price.
A) low, low
B) low, high
C) high, low
D) high, high

Question

Quizplus · Accepted Answer

The toy division prefers a low transfer price to reduce its costs and increase its profits, while the computer chip division prefers a high transfer price to increase its revenues and profits.

A Vertically Integrated Firm Produces Both a Specialized Computer Chip