Profit Maximization for an Integrated Firm

Josiah Bartlet & Sons, Inc., is a small integrated domestic manufacturer of material handling equipment. Demand and marginal revenue curves for the firm are

Relevant total cost, marginal cost, and profit functions are

Profit maximization occurs at the point where MR = MC, so the optimal output level is

This implies that

= -$0.0025(15,0002) + $75(15,000) - $312,500 = $250,000

Therefore, the optimal price/output combination is $85 and 15,000 units for this integrated firm, and profits total $250,000. To be optimal, transfer prices must ensure operation at these levels.

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