QUESTION 22 A domestic shoe company distributes running shoes and tennis shoes f
ID: 1158763 • Letter: Q
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QUESTION 22 A domestic shoe company distributes running shoes and tennis shoes for $90 per pair to it domestic shoe retailers. The marginal cost of producing a pair of running shoes is $50 and the marginal cost of producing a pair of tennis shoes is $45. Ignore any potential issues of bundling the two types of shoes together as part of the sale and any competitive effects that international sales might have on current domestic sales. A Chinese retailer offers to purchase running shoes for $55 per pair and tennis shoes for $55 per pair, for distribution in China. Is the marginal revenue from selling tennis shoes to the Chinese retailer greater or less than its marginal cost? QUESTION 23 A domestic shoe company distributes running shoes and tennis shoes for $90 per pair to it domestic shoe retailers. The marginal cost of producing a pair of running shoes is S50 and the marginal cost of producing a pair of tennis shoes is $45. Ignore any potential issues of bundling the two types of shoes together as part of the sale and any competitive effects that international sales might have on current domestic sales. A Chinese retailer offers to purchase running shoes for $55 per pair and tennis shoes for $55 per pair, for distribution in China. Should the shoe company sell running shoes to the Chinese retailer?Explanation / Answer
22) The Marginal Cost(MC) for producing a tennis shoe is 45.
The chinese retailer offers a price of 55 per pair of tennis shoe to the company. That is, the price at which the shoe company can sell the retailer is 55.
Marginal Revenue(MR) = Revenue earned when an additional unit is sold.
Since each pair is bought for 55.
Then, MR = 55
Thus MR for selling tennis shoes is greater than MC.
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23) The Marginal Cost(MC) for producing a running shoe is 50.
The chinese retailer offers a price of 55 per pair of running shoe to the company. That is, the price at which the shoe company can sell the retaler is 55.
Thus, MR = 55
MC = 50.
By selling an additional unit of shoe, the shoe company earns a positive profit of (MR - MC = 55 - 50) = 5.
Thus, the shoe company can sell shoes to the chinese retailer.
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