Homework Exercises

1. A Canadian company exports goods to France and Sweden. These markets exhibit different demand schedules and price elasticities. The exporter decides to segment the markets and engage in price discrimination. Using the information in the table below, determine the equilibrium prices and quantities under price discrimination.

CountryFranceSwedenWorld
Demand
Inverse Demandp=800-4qp=480-2q
Marginal Revenue
Marginal Cost MC=55+Q
Price  ---
Quantity

Solution to Homework Problem [PDF]

2. A Canadian Multinational Enterprise needs to produce railway cars for the Mexican and domestic Canadian market. The MNE already has a plant in Canada to serve the domestic demand of 2,000 cars per year. The plant incurs annual capital expenses of \$100m and will cost another annual \$50m to upgrade for serving any demand from Mexico. Opening a new plant in Mexico and shutting down the plant in Canada incurs a capital cost of \$200m annually. However, keeping the domestic plant for serving the domestic demand (at \$100m annually) and installing a new plant in Mexico for serving the Mexican demand separately (at a cost of \$140m annually) will bring the capital cost to a total of \$240m annually. Shipping costs for rail cars between Canada and Mexico are \$10,000 per unit. Producing a rail car costs \$80,000 in Mexico and \$100,000 in Canada.
1. At what levels of demand in Mexico will the MNE choose which of the three options: exporting from home, moving its operation to Mexico and serving both markets from Mexico, or operating separately in both countries?
2. How is the situation different when shipping costs are \$60,000 per car instead of \$10,000. How does this change the outcome?

Solution to Homework Problem [PDF]

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