Pricing of Joint Products

Products are often interrelated in production as well. For example, some products are produced in fixed ratio like production of beef and hides in the slaughterhouse. When goods are produced in fixed proportion, they are regarded as a "product package". Thus, one hide and two sides of beef might be a bundle in the case of cattle. Since these products are produced jointly, there is no conceptual basis to allocate the cost of production between the two goods.

To determine optimal price and output of each such product, the marginal revenue of the output bundle should be compared with its marginal cost of production. If the total MR i.e., the sum of marginal revenues from each product package is greater than its marginal cost than the output should be increased. Thus output should be increased until marginal cost equals the sum of the marginal revenues obtained from selling an additional unit of the product package. 

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