+1 862 207 3288 ANSWER ALL QUESTIONS
1. a) Explain why the relative prices of two goods, both produced in each of two countries, will
differ prior to any trade taking place (“autarky”), why profit-seel<ing will cause each country to
specialize – wholly or partially – in producing one of the goods, and why this specialization will
increase total world output and income.
b) Explain how “perfect” competition differs from ”imperfect” competition, and how firms in so-
called “oligopolistic” industries might be expected to adjust their prices and outputs in the latter
type of structure. 2
2_ S
You have been hired as a “Business Development Analyst” by a firm that makes an “all-purpose”
handyman tool-kit for around-the-house type jobs. The average cost of producing a unit is constant at
$200, it sells in country 1 (US) for $250, and your firm is one of four that equally share the total US
market of $6oM. Your firm is also the only one of the four US producers to export the product to
country 2, (ROW), where there are three existing (foreign) companies, each with a 30% share of a total
market (sales revenue) of $l_ooM. The (constant) unit cost of producing a unit in ROW is $225, and the
price charged by the three foreign producers is $270. However, due to “trade costs” – a 10% transport
cost and a 10% tariff imposed by country 2, both by value – the US product sells in RoW for $300
hence the significant reduction in market share – which therefore yields a net price of $250, the same as
in the US.
In order to establish production in ROW your firm would need to build a new $1oM dollar plant there,
with long-term (say, 30-year, the working life of the plant) finance currently available at 15%. No
significant maintenance costs would obtain in the first ten years, rising to $1/2M for the next ten, and
$1M per year thereafter. Your current facilities in the US are ten years old, for which the firm borrowed
$15M – $8M for the plant and $7M for “start-up”/”headquarter” costs u at a rate of 10% (also over 30
years). In addition to this interest cost these facilities have rnaintenancenand staffing “fixed” costs of
$1M a year. What would you advise the company to do, and why?
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