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Suppose that the marginal cost of an additional ton of steel produced by a Japanese firm...

Suppose that the marginal cost of an additional ton of steel produced by a Japanese firm is the same whether the steel is set aside for domestic use or exported abroad. If the price elasticity of demand for steel is smaller abroad than it is in Japan, which of the following will be correct?

A.Foreign consumers are better off when the Japanese firm applies price discrimination

B.Domestic consumers are better off when the Japanese firm applies price discrimination

C.The firm is better off when the Japanese firm applies single price

D.none of above

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Answer #1

If the marginal cost of an additional ton of steel produced by a Japanese firm is the same whether the steel is set aside for domestic use or exported abroad and the price elasticity of demand for steel is smaller abroad than it is in Japan, the Japanese firm will sell steel at a higher price abroad than they will charge domestic users. Thus domestic consumers are better off when the Japanese firm applies price discrimination. Hence the answer is option (B).

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