Suppose that a paper mill "feeds" a downstream box mill. For the downstream mill, the marginal profitability of producing boxes dedlines with volume.For example, the first unit of boxes increases earnings by $60, the second by $54, the third by $48, and so on, until the tenth unit increases profit byjust $6.The cost the upstream mill incurs for producing enough paper (one "unit" of paper) to make one unit of boxes is $6.50.Assume the two mills operate as separate profit centers, and the paper mill sets the price of paper. It follows that the marginal profitability of boxesrepresents the highest price that the box division would be willing to pay the paper division for boxes.. Furthermore, assume that fixed costs are $0for the paper mill.The following table summarizes the quantity, total revenue, and marginal costs from the perspective of the paper mill for selling paper to the box millat various prices. In the following table, fil in the marginal revenue, total cost, and total profit for the paper mill when selling paper to the box mill at each given price.TotalRevenuePriceQuantityMarginalCostMarginal revenueTotal CostProfit(MarginalProfitabillty tothe Box Mill)(Units of Paperequivalent toOne Box)($)($)($)($)($)($)$601$60$6.50%24$54$108$6.50%24$483$144$6.50%24$424.$168$6.50%24$36$180$6.50%24$306.$6.50$180$247$6.50$168$188$6.50$144$129.$6.50$108$6.50$610$60If the paper mill sets the price of paper to sell to the box milI, it will set a price of and sellunits of paper to the box mill. Profits lll befor the paper mill. Companywide profits will be(Hìnt: Recall that the prices in the table represent themarginal profitability of each unit of paper, or box, to the box mill.)Suppose the paper mill is forced to transfer paper to the box mill at marginal cost ($6.50).In this case, the box mill will demandunits of paper. This leads to companywide profits of%24AAAAAAAAAAAAAAAAAA

Here, P = price R = revenue TR = Total revenue MR = marginal revenue MC = marginal cost TC =…

Answered: ($) ($) ($) ($) ($) $60 $6.50 $108…

($) ($) ($) ($) ($) $60 $6.50 $108 $6.50 $6.50 $144 $6.50 $168 $6.50 $180 $6.50 $180 $6.50 $168 $6.50 $144 $6.50 $108 %24 %24 AAAAAAAAA

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Suppose that a paper mill "feeds" a downstream box mill. For the downstream mill, the marginal profitability of producing boxes dedlines with volume.
For example, the first unit of boxes increases earnings by $60, the second by $54, the third by $48, and so on, until the tenth unit increases profit by
just $6.
The cost the upstream mill incurs for producing enough paper (one "unit" of paper) to make one unit of boxes is $6.50.
Assume the two mills operate as separate profit centers, and the paper mill sets the price of paper. It follows that the marginal profitability of boxes
represents the highest price that the box division would be willing to pay the paper division for boxes.. Furthermore, assume that fixed costs are $0
for the paper mill.
The following table summarizes the quantity, total revenue, and marginal costs from the perspective of the paper mill for selling paper to the box mill
at various prices.

In the following table, fil in the marginal revenue, total cost, and total profit for the paper mill when selling paper to the box mill at each given price.
Total
Revenue
Price
Quantity
Marginal
Cost
Marginal revenue
Total Cost
Profit
(Marginal
Profitabillty to
the Box Mill)
(Units of Paper
equivalent to
One Box)
($)
($)
($)
($)
($)
($)
$60
1
$60
$6.50
%24
$54
$108
$6.50
%24
$48
3
$144
$6.50
%24
$42
4.
$168
$6.50
%24
$36
$180
$6.50
%24
$30
6.
$6.50
$180
$24
7
$6.50
$168
$18
8
$6.50
$144
$12
9.
$6.50
$108
$6.50
$6
10
$60
If the paper mill sets the price of paper to sell to the box milI, it will set a price of and sell
units of paper to the box mill. Profits lll be
for the paper mill. Companywide profits will be
(Hìnt: Recall that the prices in the table represent the
marginal profitability of each unit of paper, or box, to the box mill.)
Suppose the paper mill is forced to transfer paper to the box mill at marginal cost ($6.50).
In this case, the box mill will demand
units of paper. This leads to companywide profits of
%24
AAAAAAAAA
AAAAAAAAA

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