This homework is about coordination failure and coordination mechanisms.
The last two worksheets coincide with material from M&R.
Chapter 2 pages 43 - end of chapter on the medical intern matching program
and all of Chapter 3. Transfer pricing starts on page 79.

Coordination failures can end up being a big part of a course in macroeconomics. The twin phenomena known as involuntary unemployment and credit rationing might very well be attributable to coordination failures. So the concept of coordination failure has interest well beyond our class.

Ultimately we will see that one big role management plays in organizations is to provide coordination and coherence. For modeling sake, it is easier to consider mechanisms, such as the ones describe in this homework, but much coordination happens by the discretion of management (or it doesn't happen at all). One of the puzzles is how to achieve both decentralization and coordination. It is an important topic that we will discuss in class.

I'm having trouble figuring out the quantities supplied by the downstream and upstream division in the last two fill-ins on the last page. Are we supposed equate the given market price to the marginal cost and marginal benefit equations and solve for quantity to get two separate answers?

ReplyDeleteHmmm, I thought the instructions were pretty clear. In the previous case you solved for the monopoly solution, where the upstream firm sets the price and then were the downstream firm buys as much as it wants at that price.

DeleteFor the last two questions, you are doing the opposite, where the downstream firm sets the price and the upstream firm gets to sell as much as it wants at that price. If you understood that previous monopoly solution, you should be able to figure this one out too.

in the last question of excel homework(transfer price with external competitive market), do I use marginal benefit and marginal cost to find upstream and downstream quantities? If not, could you give me some tips on this question?

ReplyDeleteFirst, this case is analyzed in M&R. So I encourage you to read the textbook and see if you understand the explanation there. Second, you should understand for an arbitrary transfer price set by the Center, how much the upstream division wants to produce at that price and how much the downstream division wants to consume at that price. Third, you should observe that for an arbitrary transfer price, the amount the upstream division wants to produce will differ from what the downstream division wants to consume, but that when there is an external market, one or both of the divisions has the alternative of going to the market, instead of, or in addition to transacting internally to the organization.

ReplyDeleteSo I'm not answering your question directly, because I'd like you to think it through. But once you have, I hope you can answer your own question.

I've done the readings but I'm still a bit confused as how to figure out the last two questions of the last page.

ReplyDeleteI've also gave some thought to the previous advice you gave in solving these problems but I keep on getting the incorrect answer. Is it possible to perhaps get a more in depth explanation in class since some of us seem to be having trouble with this question?

I too am having a really hard time with the last two questions. I have read the book and the previous comments but am still confused on how to approach the problem. I have tried numerous different ways, but still do not understand why can't setting the MR and MC equal to quantity isn't right. Any additional help would be much appreciated.

ReplyDeleteAre you using Cell references for the price?

ReplyDeleteThe algebra is pretty simple. For the upstream division, the amount supplied, Q, when the transfer price is P satisfies C + D*Q = P. That equation must be solved for Q. Then use the cell references from the parameters, C and D, and for the transfer price, P.

You then do something quite similar for the demand equation for the downstream division.

Thanks for your help. I was using the transfer price value without cell referencing it.

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