a domestic shoe company distributes running shoes and tennis shoes for $95 per p

Question

a domestic shoe company distributes running shoes and tennis shoes for $95 per pair. The marginal cost of producing a pair of running shoes is $60, and the marginal cost of producing a pair of tennis shoes is $45. 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 any shoes to the Chinese retailer? (Ignor 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 domesti sales.)

Explanation / Answer

domestic
running shoe cost 60
tennis shoe cost 45

Chinese purchase
running shoe 55
tennis shoe 55

distribution of shoes 95 for pair or 47.5 each
profit if distributed to china
(55-47.5)+(55-47.5)=15

In this case, they make money by producing and selling domestically, and by shipping the shoes to China. They should expand globally to China since this group of consumers have a completely different demand function. In this case, we are price discriminating.

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