Question

As a junior research analyst at a MNE, you are asked to make a recommendation for where the firm’s new Wifi-enabled mousetrap will be produced. Production costs in Country A are $22 per mousetrap and $20 in Country B. However, the firm will face a tax burden of $3 per mousetrap in Country A vs. $4 in Country B.

a. Which country offers the lowest overall cost per mousetrap? Briefly explain.

b. Suppose that Country A’s government contacts you offering to reduce taxes to $2 per mousetrap and to provide the land for the new factory. According to your calculations, the use of the land represents a subsidy of $1 per mousetrap. Which country now offers the lowest overall cost per mousetrap? Briefly explain.

Answer 1

	Production Cost $ (Per mousetrap)	Tax $ (Per mousetrap)	Overall Cost $ (Per mousetrap)
Country A	22	3	25
Country B	20	4	24

a. According to the above table Overall Cost is calculated by adding production cost plus Tax per mousetrap.Hence Country B is offering the lowest Overall cost per mousetrap which is $24.

b. If the Country A reduces the tax to $2, then the Overall Cost would be $22 + $2= $24.Then the use of the land will provide a subsidy of $1 per mousetrap. So now the Overall Cost for Country A would be $24-$1= $23. According to this Country A offers the lowest overall cost per mousetrap.