Clearly,an economist would like to see a profit center implement a system that most closely approximates the rule of profit maximization,MR = MC,in building a system of prices for other divisions.What are the pluses and minuses of allowing a division to engage in this type of activity?

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The Answer is MR = MC will drive a division to its most efficient production level,all else constant.However,this ignores possible linkages between divisions.For example,if a higher MR for an upstream division yields a higher MC for a downstream division,as in some transfer pricing scenarios,the value of the firm will decrease.One solution is to centrally control transfer prices to minimize negative impacts of an upstream division on a downstream division.

Clearly,an Economist Would Like to See a Profit Center Implement