An outside firm can make components according to the cost function TC=1m + 10Q. Suppose it typically produces 10m units.
(a) What is this firm’s cost per unit? Suppose that your firm is able to buy components at this cost per unit. If you order 1m units from this outside firm, what is your total cost of components?
(b) Suppose you can produce the component yourself with the same total cost function; TC=1m + 10Q. How much do the 1m components cost?
(c) If the transaction cost of dealing with an independent firm is .8m and the internal cost of managing your own component division is .2m, is it more profitable to outsource?