Ajax Computer makes a computer for climate control in office buildings. The company uses a microprocessor produced
Question:
a. Suppose an outside market for the microprocessor develops and that Ajax has monopoly power in that market, selling microprocessors for $1000 each. Assuming that demand for the microprocessor is unrelated to the demand for the Ajax computer, what transfer price should Ajax apply to the microprocessor for its use by the downstream computer division? Should production of computers be increased, decreased, or left unchanged? Explain briefly.
b. How would your answer to (a) change if the demands for the computer and the microprocessors were competitive; i.e., if some of the people who buy the microprocessors use them to make climate control systems of their own?
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