Question

Suppose the home firm is considering whether to enter the foreign market. Assume

that the home firm has the following costs and demand:

Fixed costs = $400

Marginal costs = $13 per unit

Local price = $25

Local quantity = 20

Export price = $26

Export quantity = 20

a. What is the firm’s average cost from selling only in the local market?

b. Calculate the firm’s profit from selling (i) just to Home’s market; (ii) to both markets.

c. Is the home firm dumping? Briefly explain.

Answer 1

Fixed costs = $400

Marginal costs = $13 per unit

Local price = $25

Local quantity = 20

Export price = $26

Export quantity = 20

a.

Average cost of selling in local market= Average fixed cost + Average variable cost

Average variable cost= Marginal cost(when constant)= $13

Average fixed cost= Fixed cost/Local quantity= 400/20= $20

Average cost of selling in local market= $13+$20= $33

b.

i) Profit(when only to local market)= (Local price-Average cost) x Local quantity

Profit(when only to local market)= (25-33) x 20= -8 x 20= -160

ii) Profit(when both market)= Total revenue - total cost

Total revenue= Local quantity x Local price + Export price x export quantity

Total revenue= 25 x 20+26 x 20= 500+520= 1020

Total cost= Fixed cost + Average variable cost x (Local quantity + export quantity)

Total cost= $400 + 13(20+20)= 400+520= 920

Profit (when both market)= 1020-920= $100

c.

Dumping refers to the situation when a domestic country sells its surplus quantity in foreign market at lower price as compared to price in local domestic market. Here in this case, Local price is lower than the export price which implies no dumping by the home firm.