# Transfer Pricing

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Jump to navigationJump to search## Transfer Pricing with No Outside Market

- In general in these problems we will be given
**Failed to parse (MathML with SVG or PNG fallback (recommended for modern browsers and accessibility tools): Invalid response ("Math extension cannot connect to Restbase.") from server "https://wikimedia.org/api/rest_v1/":): {\displaystyle MC_u}**which will be the marginal cost for the upstream firm and**Failed to parse (MathML with SVG or PNG fallback (recommended for modern browsers and accessibility tools): Invalid response ("Math extension cannot connect to Restbase.") from server "https://wikimedia.org/api/rest_v1/":): {\displaystyle MC_d}**which will be the marginal cost for the downstream firm. - We also define
**Failed to parse (MathML with SVG or PNG fallback (recommended for modern browsers and accessibility tools): Invalid response ("Math extension cannot connect to Restbase.") from server "https://wikimedia.org/api/rest_v1/":): {\displaystyle P_T}**as the transfer price between the downstream firm and the upstream firm. The downstream firm will be paying the upstream firm this transfer price for every good that he produces. - To optimize profit, we set
**Failed to parse (MathML with SVG or PNG fallback (recommended for modern browsers and accessibility tools): Invalid response ("Math extension cannot connect to Restbase.") from server "https://wikimedia.org/api/rest_v1/":): {\displaystyle P_T = MC_u}** - Therefore, to find the quantity that maximizes profit we set
**Failed to parse (MathML with SVG or PNG fallback (recommended for modern browsers and accessibility tools): Invalid response ("Math extension cannot connect to Restbase.") from server "https://wikimedia.org/api/rest_v1/":): {\displaystyle MR = MC_u + MC_d}**

## Transfer Pricing with Competitive External Market

- In this case, the marginal cost for the activities of the upstream firm is still
**Failed to parse (MathML with SVG or PNG fallback (recommended for modern browsers and accessibility tools): Invalid response ("Math extension cannot connect to Restbase.") from server "https://wikimedia.org/api/rest_v1/":): {\displaystyle MC_u}**but the marginal cost for the supplies of the downstream firm,**Failed to parse (MathML with SVG or PNG fallback (recommended for modern browsers and accessibility tools): Invalid response ("Math extension cannot connect to Restbase.") from server "https://wikimedia.org/api/rest_v1/":): {\displaystyle MC_d}**, is now the competitive external price of the of the supplies. - Therefore to optimize profit the downstream firm should set
**Failed to parse (MathML with SVG or PNG fallback (recommended for modern browsers and accessibility tools): Invalid response ("Math extension cannot connect to Restbase.") from server "https://wikimedia.org/api/rest_v1/":): {\displaystyle MR = MC_d + P_c}**where**Failed to parse (MathML with SVG or PNG fallback (recommended for modern browsers and accessibility tools): Invalid response ("Math extension cannot connect to Restbase.") from server "https://wikimedia.org/api/rest_v1/":): {\displaystyle P_c}**is the price of the upstream goods in a competitive market. - The downstream firm should set
**Failed to parse (MathML with SVG or PNG fallback (recommended for modern browsers and accessibility tools): Invalid response ("Math extension cannot connect to Restbase.") from server "https://wikimedia.org/api/rest_v1/":): {\displaystyle P_c = MC_u}** - Alternatively, it is possible to maximize profits by calculating
**Failed to parse (MathML with SVG or PNG fallback (recommended for modern browsers and accessibility tools): Invalid response ("Math extension cannot connect to Restbase.") from server "https://wikimedia.org/api/rest_v1/":): {\displaystyle Profit = P_f * Q_f - TC_f - TC_i + P_c * (Q_i - Q_f)}**, where "i" stands for intermediate good and "f" stands for finished good. - Next we take
**Failed to parse (MathML with SVG or PNG fallback (recommended for modern browsers and accessibility tools): Invalid response ("Math extension cannot connect to Restbase.") from server "https://wikimedia.org/api/rest_v1/":): {\displaystyle \frac{dProfit}{dQ_i}}**and set it equal to zero to find the optimum quantity of intermediate goods. - Finally, we take
**Failed to parse (MathML with SVG or PNG fallback (recommended for modern browsers and accessibility tools): Invalid response ("Math extension cannot connect to Restbase.") from server "https://wikimedia.org/api/rest_v1/":): {\displaystyle \frac{dProfit}{dQ_f}}**and set it equal to zero to find the optimum quantity of final goods.