Consider a Japanese firm that sells product Y in the local market and contemplates sales to the US. If the Japanese firm enters the American market it will compete in quantities against a US firm already in the market. The inverse demand for Y in the US is Pus = 250 – Q (all prices and costs in this problem are in ŞUS), where Q = qu + qj, is total quantity eventually sold by the two competitors. The production of Y requires operating a plant at a fixed cost F = 300, as well as 1 unit of labor and 1 unit of capital per unit of output. Currently, at both the US and Japan the cost of capital is $15/unit and that of labor $10/unit. The Japanese firm has the option to either invest directly in operating a plant in the US, or use at no extra fixed cost its already existing plant in Japan, shipping its product to the US. In that case a transportation cost of $10/unit has to be paid on top of any production cost; also, American customs require a $5/unit duty for any Y imports. a) Find the price of Y in the US b) The profits of the American and the Japanese firm and c) Total labor income in the Y sector in the US. d) Political pressure by unions in the US results in a new wage of $25/unit. Repeat the above calculations in the new situation
Consider a Japanese firm that sells product Y in the local market and contemplates sales to the US. If the Japanese firm enters the American market it will compete in quantities against a US firm already in the market. The inverse demand for Y in the US is Pus = 250 – Q (all prices and costs in this problem are in ŞUS), where Q = qu + qj, is total quantity eventually sold by the two competitors. The production of Y requires operating a plant at a fixed cost F = 300, as well as 1 unit of labor and 1 unit of capital per unit of output. Currently, at both the US and Japan the cost of capital is $15/unit and that of labor $10/unit. The Japanese firm has the option to either invest directly in operating a plant in the US, or use at no extra fixed cost its already existing plant in Japan, shipping its product to the US. In that case a transportation cost of $10/unit has to be paid on top of any production cost; also, American customs require a $5/unit duty for any Y imports. a) Find the price of Y in the US b) The profits of the American and the Japanese firm and c) Total labor income in the Y sector in the US. d) Political pressure by unions in the US results in a new wage of $25/unit. Repeat the above calculations in the new situation
Chapter14: Multinational Capital Budgeting
Section: Chapter Questions
Problem 3ST
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Transcribed Image Text:Consider a Japanese firm that sells product Y in the local market and contemplates sales to the US. If the
Japanese firm enters the American market it will compete in quantities against a US firm already in the
market. The inverse demand for Y in the US is Pus = 250 - Q (all prices and costs in this problem are in
ŞUS), where Q = qu + qj, is total quantity eventually sold by the two competitors. The production of Y
requires operating a plant at a fixed cost F = 300, as well as 1 unit of labor and 1 unit of capital per unit of
output. Currently, at both the US and Japan the cost of capital is $15/unit and that of labor $10/unit. The
Japanese firm has the option to either invest directly in operating a plant in the US, or use at no extra fixed
cost its already existing plant in Japan, shipping its product to the US. In that case a transportation cost of
$10/unit has to be paid on top of any production cost; also, American customs require a $5/unit duty for
any Y imports.
a) Find the price of Y in the US
b) The profits of the American and the Japanese firm and
c) Total labor income in the Y sector in the US.
d) Political pressure by unions in the US results in a new wage of $25/unit. Repeat the above
calculations in the new situation
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