Question

In: Economics

Assume that all production of an essential (but reasonably priced) consumer product is moved to a...

Assume that all production of an essential (but reasonably priced) consumer product is moved to a third world country, to take advantage of lower labor and raw material costs. Almost everyone purchases modest amounts of this item on a periodic basis. Answer the following questions (one to four sentences each).

  1. Who will benefit from this development (other than the shareholders and managers of the firm)? Hint: You might want to draw a supply and demand graph for this consumer product. Please explain.

  1. Who will be hurt by this development? Please explain.
  1. Assume that (from the perspective of society) the marginal benefits of this policy exceed the marginal costs by a wide margin. Why is it still possible that public opinion could turn against this policy? Please explain.

Solutions

Expert Solution

A. The third world country and our country both will benefit from this development. It is because now this commodity will become cheaper for us and we can employ our resources for the production of more important things. This will lead to increase in consumer demand. For the third world country it will be beneficial as they will produce more and sell more of this community to us and other nations they trade with. Thus this development will be good for both the nations.

B. The domestic producers of this community will be hurt by this development as they will not be able to produce this commodity now. Now it will be cheaper as compared to before and if their price is high they will not be able to sell it in the market and will have to shut down. So the domestic producers of this commodity will be hurt with this development.

C. Even if the marginal benefit of this policy exceeds the marginal cost by a wide margin there may still be people again this policy. It may be because a larger part of the people may be hurt by the import of this commodity. If there were large number of producers of this commodity then the producers would be hurt as they would not earn like they used to. So they may turn against this policy as they may run out of business.

Rahul Sunny answered 15 hours ago
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