To Circumvent the Problem of Double Marginalization

question 4

Multiple Choice

To circumvent the problem of double marginalization:

• A) transfer prices must be set that maximize the overall value of the firm rather than the profits of the upstream division.
• B) firms should engage in two-part pricing, unless it is possible to engage in either first- or second-degree price discrimination.
• C) firms should vertically integrate.
• D) None of the answers are correct.

---

Definitions:

Dividends

Distributions from a company to its shareholders, usually coming from the firm's earnings.

Cumulative Preferred Stock

A type of preferred stock that accrues dividends in the event that any dividends are missed, ensuring that preferred shareholders are paid both missed and current dividends before any are paid to common shareholders.

Common Stock

A type of equity security that represents ownership in a corporation, with voting rights and potential for dividends.

Dividends

Distributions made to shareholders by a company, often from its earnings.