Suppose that a U.S. firm and a Japanese firm produce identical output, use ident

ID: 1190347 • Letter: S

Question

Suppose that a U.S. firm and a Japanese firm produce identical output, use identical technology, and face identical input prices. Furthermore, when the world price of output is $1,000 per unit, the profit-maximizing (loss-minimizing) output level for each firm would be 100 units per day. Also suppose that at this output level, total costs at each firm would be $120,000. Moreover, total fixed costs for the U.S. and Japanese firms are respectively $15,000 and $45,000. As a consequence of the economic situation described above, the U.S. firm has decided to shut down, while the Japanese firm has continued to operate. The U.S firm has accused the Japanese firm of "dumping", an illicit practice whereby a company purposefully sells goods at unprofitable prices to steal market share from its international competitors. Using the available data discuss analytically whether the dumping accusations are well grounded or not.

Explanation / Answer

Japanese

Total Cost at 100 units of prod

$ 120,000.00

(-) Total Fixed Cost

$ (15,000.00)

$ (45,000.00)

Total Variable cost

$ 105,000.00

$ 75,000.00

No of Units

$ 100.00

Variable cost per unit

$ 1,050.00

$ 750.00

Price per unit

$ 1,000.00

For Japanese firm, the variable cost per unit is less than the price of the product(when the quantity increases the profit also increases as the fixed cost is remains fixed at any level of production), so they are selling the units at profitable price only. the dumping accusations are not well grounded.