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 = $ 200Marginal cost= $ 10 per unit Local price = $ 20 Local quantity = 20 Export price = $ 15 Export quantity = 10 a. Calculate the firm’s total costs from selling only in the local market. b. What is the firm’s average cost from selling only in the local market? c. Calculate the firm’s profit from selling only in the local market. d. Should the home firm enter the foreign market? Briefly explain why.e. Calculate the firm’s profit from selling to both markets. f. Is the home firm dumping? Briefly explain.

Answer 1

1. Total cost = Fixed cost + variable cost

variable cost = 10*20=200

Total cost =$200+$200

=$400

2. Average cost = Total cost/quantity

=400/20

=$20

3. Profit=Total revenue-total cost

=$20*20-400

=0

4. The firm should enter into the foreign market because the foreign price is higher than the marginal cost. Therefore, the firm has an opportunity to earn more profit.

5. If firm is selling in both markets

Total revenue =$20*20 +$15*10

=$550

total cost =$400+ $10*10

=$500

profit =$550-$500

=$50