Suppose that a paper mill "feeds" a downstream box mill. For the downstream mill, the marginal profitability of producing boxes declines with volume. For example, the first unit of boxes increases earnings by $10, the second by $9, the third by $8, and so on, until the tenth unit increases profit by just $1. The cost the upstream mill incurs for producing enough paper (one "unit" of paper) to make one unit of boxes is $3.50. 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 $0 for the paper mill. The following table summarizes the quantity, total revenue, and marginal costs from the perspective of the paper mill for selling paper to the box mill at various prices. In the following table, fill in the marginal revenue, total cost, and total profit for the paper mill when selling paper to the box mill at each given price. Price (Marginal Quantity Total Revenue Marginal revenue Total Cost Marginal Cost Profit Profitability to the (Units of Paper Box Mill) equivalent to One ($) Box) ($) ($) ($) ($) $10 1 $10 $3.50 $3.50 $9 2 $18 $ $3.50 $8 3 $24 $ $3.50 $7 4 $28 $ $ $3.50 $6 5 $30 $ $ $3.50 $5 6 $30 $ $ $3.50 $4 7 $28 $ $ $3.50 $3 8 $24 $ $3.50 $2 9 $1 10 $18 $10 $ $3.50 $ units of paper to the box mill. Profits will be (Hint: Recall that the prices in the table represent the If the paper mill sets the price of paper to sell to the box mill, it will set a price of for the paper mill. Companywide profits will be $ marginal profitability of each unit of paper, or box, to the box mill.) and sell Suppose the paper mill is forced to transfer paper to the box mill at marginal cost ($3.50). In this case, the box mill will demand units of paper. This leads to companywide profits of
Suppose that a paper mill "feeds" a downstream box mill. For the downstream mill, the marginal profitability of producing boxes declines with volume. For example, the first unit of boxes increases earnings by $10, the second by $9, the third by $8, and so on, until the tenth unit increases profit by just $1. The cost the upstream mill incurs for producing enough paper (one "unit" of paper) to make one unit of boxes is $3.50. 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 $0 for the paper mill. The following table summarizes the quantity, total revenue, and marginal costs from the perspective of the paper mill for selling paper to the box mill at various prices. In the following table, fill in the marginal revenue, total cost, and total profit for the paper mill when selling paper to the box mill at each given price. Price (Marginal Quantity Total Revenue Marginal revenue Total Cost Marginal Cost Profit Profitability to the (Units of Paper Box Mill) equivalent to One ($) Box) ($) ($) ($) ($) $10 1 $10 $3.50 $3.50 $9 2 $18 $ $3.50 $8 3 $24 $ $3.50 $7 4 $28 $ $ $3.50 $6 5 $30 $ $ $3.50 $5 6 $30 $ $ $3.50 $4 7 $28 $ $ $3.50 $3 8 $24 $ $3.50 $2 9 $1 10 $18 $10 $ $3.50 $ units of paper to the box mill. Profits will be (Hint: Recall that the prices in the table represent the If the paper mill sets the price of paper to sell to the box mill, it will set a price of for the paper mill. Companywide profits will be $ marginal profitability of each unit of paper, or box, to the box mill.) and sell Suppose the paper mill is forced to transfer paper to the box mill at marginal cost ($3.50). In this case, the box mill will demand units of paper. This leads to companywide profits of
Essentials of Economics (MindTap Course List)
8th Edition
ISBN:9781337091992
Author:N. Gregory Mankiw
Publisher:N. Gregory Mankiw
Chapter12: The Cost Of Production
Section12.3: The Various Measures Of Cost
Problem 3QQ
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Transcribed Image Text:Suppose that a paper mill "feeds" a downstream box mill. For the downstream mill, the marginal profitability of producing boxes declines with volume.
For example, the first unit of boxes increases earnings by $10, the second by $9, the third by $8, and so on, until the tenth unit increases profit by
just $1.
The cost the upstream mill incurs for producing enough paper (one "unit" of paper) to make one unit of boxes is $3.50.
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 $0
for the paper mill.
The following table summarizes the quantity, total revenue, and marginal costs from the perspective of the paper mill for selling paper to the box mill
at various prices.
In the following table, fill in the marginal revenue, total cost, and total profit for the paper mill when selling paper to the box mill at each given price.
Price
(Marginal
Quantity
Total
Revenue
Marginal revenue
Total Cost
Marginal
Cost
Profit
Profitability to the
(Units of Paper
Box Mill)
equivalent to One
($)
Box)
($)
($)
($)
($)
$10
1
$10
$3.50
$3.50
$9
2
$18
$
$3.50
$8
3
$24
$
$3.50
$7
4
$28
$
$
$3.50
$6
5
$30
$
$
$3.50
$5
6
$30
$
$
$3.50
$4
7
$28
$
$
$3.50
$3
8
$24
$
$3.50
$2
9
$1
10
$18
$10
$
$3.50
$
units of paper to the box mill. Profits will be
(Hint: Recall that the prices in the table represent the
If the paper mill sets the price of paper to sell to the box mill, it will set a price of
for the paper mill. Companywide profits will be $
marginal profitability of each unit of paper, or box, to the box mill.)
and sell
Suppose the paper mill is forced to transfer paper to the box mill at marginal cost ($3.50).
In this case, the box mill will demand
units of paper. This leads to companywide profits of
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