Question

A U.S. firm wants to sell its product to two different markets abroad: Belgium and New Zealand, and you must decide whether to do so by exporting or by producing locally in that market through FDI (setting a subsidiary). In both destinations, the demand for the product is: P = 50 – Q, [Marginal revenue is MR = 50– 2*Q ]. P is the price your firm charges in that country in dollars and Q is the quantity sold there. The marginal cost of production is $10 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 $300. To produce in the U.S. and export to Belgium requires a transport cost of 10 dollars per unit shipped. To produce in the U.S. and export to New Zealand requires a transport cost of 30 dollars per unit shipped. a) Assume you sell aborad by setting up a subsidiary (FDI) in Belgium and New Zealand. Compute the quantity, price and profits you obtain in each case. b) Assume you sell aborad by exporting to Belgium and New Zealand. Compute the quantity, price and profits you obtain in each case. c) Will you export or set a subsidiary in Belgium? And in New Zealand?

Answer 1