Question

Regions A and B produce the same commodity and each export all of it to Region C. If the per-unit export price is $10 higher in Region A than in Region B, what can be concluded about the transfer costs (denoted by t(ij), where i and j can be A, B, or C) between these three Regions?

Group of answer choices

a) t(AB)>10; t(BC)+t(AC)=10

b) t(AB)>10; t(BC)-t(AC)=10

c) t(AB)<10; t(BC)-t(AC)≤10

d) t(AB)=10; t(BC)+t(AC)≤10

Answer 1

Let us make a small diagram to understand the locations of each region better:



What we get to understand from above is, Goods from A to C have to travel more than goods from B to C. That is the reason why export price of A is higher than that of B. The mentioned difference of $10 can be equal to or less than this differential transportation cost.

Now, let us evaluate the options given (look for the reasoning in orange color text) :

a) t(AB)>10; t(BC)+t(AC)=10 How can t(BC)+t(AC)=10 be so? If that is to be believed, it means that transportation cost between B and C are zero. This is impossible when B and C are two different regions. Also, if distance between A and B had costed more than $10, the exports from A would have been more expensive than given in the question. This is an incorrect statement.

b) t(AB)>10; t(BC)-t(AC)=10 How can this be true? It says t(BC) minus t(AC) is a positive 10. It suggests that distance between A to C is shorter than that between B to C. This is also impossible. Also, if distance between A and B had costed more than $10, the exports from A would have been more expensive than given in the question. Even this statement is incorrect.

c) t(AB)<10; t(BC)-t(AC)≤10 It says the difference of transportation cost between BC and AC must be less than or equal to 10. In other words it is saying that transportation cost between AB must be less than or equal to 10; and that is what making the exports from A costlier by $10. Please note that this statement either does not look free from flaws because this statement attempts to reduce AC from BC and give a positive value. But when we compare it with rest of the three options, this one seems to be best fitting into the given scenario.

d) t(AB)=10; t(BC)+t(AC)≤10 It says if we add distance between B and C to the distance between A and C, the resulting transportation cost will be either less than or equal to 10. This is also impossible in light of the fact we already know that transportation cost between A and B alone are $10 (it is written in d. option itself). This option has another flaw. On one hand it says distance between AB costs 10, whereas distance between BC and AC together cost less than or equal to 10. This is another contradiction, forcing us to say even this option is incorrectly put.