The Happy Mountain Brewing Company sells ground organic coffee in one pound containers through several grocery chains in the US

The firm has two divisions: the roasting division buys raw organic coffee beans and then blends, roasts, and grinds the beans, and the merchandising division packages and distributes the ground coffee. a. Please draw a carefully labeled figure that illustrates the optimal transfer pricing policy for the firm if there is no outside market and the firm is a monopoly seller (i.e., there are no other sellers of ground organic coffee). In particular, please show the optimal transfer price that is paid to the roasting division, the optimal retail price charged by the merchandising division, and the optimal amount of coffee sold. b. Suppose poor weather conditions in South American increase the price of raw coffee beans. How does this affect the marginal cost curve for the roasting division? Does this also affect the marginal cost of merchandising (packaging and distribution)? How do the optimal transfer price, retail coffee price, and quantity sold change due to this weather problem?

a.
The figure should be structured like Figure A11.1 in the text. In this case, the optimal quantity of coffee is determined where the marginal cost of roasted coffee intersects the net marginal revenue curve, and the optimal transfer price is also determined at this point of intersection. The optimal retail price of coffee is determined by the market demand curve at the optimal quantity of coffee production.

b.
Under this scenario, the marginal cost of roasted coffee shifts upward, and the marginal cost of merchandising does not shift. Accordingly, the net marginal revenue curve does not shift, but the optimal quantity of coffee production declines due to the upward shift in the marginal cost of roasting. The optimal transfer price for roasted coffee increases, and the optimal retail price of coffee also increases due to the decline in the profit maximizing quantity of coffee.