The production of X is subject to substantial internal economies able to support
ID: 2439320 • Letter: T
Question
The production of X is subject to substantial internal economies able to support a only few firms that produce X. The figure on the right shows the long-run average costs of production in Japan and South Korea. Average Costs of X Production for a Firm in of sc ale such that the world market will be P ($) 10 9 8 AC Which country has the lower long-run average production costs? Briefly explain. What is the minimum price that would allow a firm operating in Japan to break even? A South Korean firm? Briefly explain. a. lapan AC South Korea c. Suppose that X is a new product and there is currently no production of X anywhere in the world. Which of the two countries is more likely to become a major producer and exporter of X? Briefly explain. Suppose instead that X is an established product and there is an established firm in Japan that already produces 6M units of X per year. What level of production would a South Korean firm entering the X market need in order to match the minimum long-run price the Japanese firm could charge without suffering losses itself? Briefly explain. 0 1 2 3 45 6 7 8 9 10 Q (M. of units) d. e. IfX is currently produced by a Japanese firm, would the world gain from the successful entry of a South Korean firm? Briefly explain.Explanation / Answer
Answer 8 :
a) South Korea has lower long run average costs, because its AC curve is consistently below the AC curve for Japan for all levels of output.
(b) Minimum price to break-even is the minimum point of the AC curve. Therefore,
Break-even price for Japan = $5
Break-even price for South Korea = $3
(c) South Korea is more likely to become producer of X because it can produce X at consistently lower average cost than Japan can.
(d) Minimum long-run price is $3 for South Korea, which is its minimum long run average cost, which is the no-profit, no-loss point.
(e) The world would gain from entry of South Korea firm. Since a South Korean firm can produce at a lower AC, it can charge a lower price compared to Japan’s firm, which will benefit global consumers in form of lower price and higher consumer surplus.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.