Question

Suppose that the marginal cost of an additional ton of steel produced by a Japanese firm is the same whether the steel is set aside for domestic use or exported abroad. If the price elasticity of demand for steel is greater abroad than it is in Japan, which of the following will be correct
a.The Japanese will sell more steel abroad than they will sell in Japan.
b.The Japanese will sell more steel in Japan than they will sell abroad.
c.The Japanese will sell steel at a lower price abroad than they will charge domestic users.
d.The Japanese will sell steel at a higher price abroad than they will charge domestic users.
e.Insufficient information exists to determine whether the price or quantity will be higher or lower abroad.

Answer 1

Answer:

C) The Japanese will sell steel at a lower price abroad than they will charge domestic users.

Explanation:

Since the price elasticity of demand (PED) is higher abroad than in Japan, by exporting at a lower cost, the company is increasing the quantity exported in a greater proportion than it would if it sold the steel locally.

Price elasticity of demand (PED) measures how much does the quantity demanded of a good changes in proportion to a change in its price. For example, if the price increases by 10% but the demand only decreases by 5%, the PED is inelastic (= 5% / 10% = 0.5).

When

• PED < 1, it is inelastic
• PED > 1, it is elastic
• PED = 1, it is unitary