Why might a company establish internal markets within its organization?

• A. To reduce the need for any form of pricing mechanism
• B. To increase government regulation of its operations
• C. To eliminate competition between its products and services
• D. To allocate resources more efficiently among different divisions

Answer: (D)

Verified step by step guidance

1. Understand the concept of internal markets: These are systems within a company where different divisions or departments trade goods or services with each other using prices, similar to external markets.
2. Recognize the purpose of internal markets: They help simulate market conditions inside the firm, allowing divisions to make decisions based on costs and benefits as if they were independent entities.
3. Analyze why internal markets improve resource allocation: By using prices internally, the company can identify which divisions use resources efficiently and which do not, promoting better decision-making.
4. Consider the alternatives: Without internal markets, resource allocation might rely on central planning or arbitrary decisions, which can be less efficient and less responsive to changes in demand or costs.
5. Conclude that internal markets are established primarily to allocate resources more efficiently among different divisions, rather than to reduce pricing mechanisms, increase regulation, or eliminate competition.