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Problem 2: Exporting vs FDI: The Proximity €Concentration Trade-€Off.

Your firm wants to sell its product in each of several foreign countries, and you must decide whether to do so by exporting or by producing locally for that market through FDI. Suppose that in each country the demand for the product is the same, and is given by:

P = 15 - Q,

Where P is the price your firm charges in that country in dollars and Q is the quantity sold there. In addition, the marginal cost of production in any country is the same and is equal to $4 per unit. Wherever you choose to produce, your firm is a monopolist. To produce in a foreign country, your firm must incur a fixed cost equal to $21. On the other hand, to produce here and export to a country that is d miles away requires a transport cost of (d/1000) dollars per unit shipped.

a. If you export to a given country located at a distance d, what would the quantity sold, the price charged, and the profits be? (all as a function of distance)

b. If you sell in a given country by setting up a subsidiary, what would the quantity sold, the price charged, and the profits be?

c. For what values of d will your profit-maximizing decision be the export option? The FDI option?

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Joshua Stredder
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28 Sep 2019

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Related questions

In the country of Wiknam, there is only one firm that produces and sells soccer ball. Initially, international trade is prohibited in the country. The following equations describe the monopolist's demand, marginal revenue, total cost and marginal cost: Demand: P = 10 - Q Marginal Revenue: MR = 10 - 2Q Total Cost: TC = 3 + Q + 0.5Q2 Marginal Cost: MC = 1 + Q Q stands for quantity and P is the price measured in Wiknamian dollars.

a) How many soccer balls does the monopolist produce? At what price are they sold? What is the monopolist's profit? Show all your calculations.

b) One day, the King of Wiknam decrees that henceforth, there will be free trade- either imports or exports- of soccer balls at the world price of $6. The firm now becomes a price taker in a competitive market. What happens to the domestic production of soccer balls? What happens to domestic consumption? Does Wiknam export or import soccer balls?

c) Suppose that the world price was not $6, but instead, happens to be exactly the same as the domestic price without trade as determined in part a) above. Would allowing trade change anything for the Wiknamian economy? Explain

Consider a world with two countries, A and B, in which consumers are obsessed with the consumption of YokiPooki, which is considered to be the latest and greatest in VR entertainment. The two counties are identical: each has an aggregate demand for YokiPooki given by 1000p, and two firms producing this service. YokiPooki is produced at a constant marginal cost of $10 per unit by the firms in country A and at a constant marginal cost of $20 per unit by the firms in country B. The firms in each country are fully owned by consumers in that country. Initially, there is no international trade between countries, so each firm can sell only in its own country. What is the equilibrium quantity of YokiPooki produced by each firm in country A? What is the equilibrium quantity of YokiPooki produced by each firm in country B? After some negotiations, the two countries sign a trade agreement and agree to have YokiPooki bought and sold in a single world market (with a common world price for YookiPooki). What is the equilibrium level of YokiPooki produced by each firm in country A? What is the equilibrium level of YokiPooki produced by each firm in country B? After the law is passed, lobbyists for the firms in country B convince politicians to keep the world market but introduce a tax of $10 per unit on YokiPooki sold by firms from country A, regardless of where their sales take place. What is the equilibrium level of YokiPooki produced by each firm in country A? What is the equilibrium level of YokiPooki produced by each firm in country B?

For both problems below, round your final answers to the level of output to the nearest unit since it is not possible to produce a fraction of a unit.

1) The market for Commodity A operates in a perfectly competitive market and the demand curve is defined by:

P = 100 - 0.2QD

The supply curve is defined as:

P = 2 + 0.3QS

Solve for the equilibrium levels of price and quantity that the market will bear.

You are the manager of your firm and you are trying to decide how much output you will be producing. You have total fixed costs of $10 and total variable costs of:

TVC = Q + 0.5Q2

How much of the total market quantity should your firm produce to maximize its profit? How can you confirm that this level is really a maximum and not a minimum?

2) Assume that you work for the same firm above. Your firm has identified a developing country as an area of expansion. There are no current producers of Commodity A in this developing country so your firm will be the sole producer of this product. Assume that the demand curve for Commodity A in this developing economy is the same as the one described above. If your objective is to maximize profit, what will be the level of output you will produce, and what will be the market price for Commodity A. Compare your results from problem 1) above. What accounts for the difference? Who suffers and who benefits from these differences?

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