4. Choice between direct exporting and FDI Aa Aa Igrushka is a profit-maximizing

Question

4. Choice between direct exporting and FDI Aa Aa Igrushka is a profit-maximizing firm producing wooden dolls, which it can produce and sell in Russia, its home country, and in France. The average cost curve (AC) on the following graph represents Igrushka's cost of producing wooden dolls within one factory, whether in Russia or in France. If Igrushka produces wooden dolls in one country and sells them in the other, however, it incurs an additional shipping cost equal to $2.00 per transported toy Tool tip: Mouse over the points to see their coordinates. COST (Dollars per wooden doll) 10 AC 20 40 60 80 100 QUANTITY IThousands of wooden dolls Suppose that at the current market prices of wooden dolls, the demand for Igrushka's product is 20,000 wooden dolls per year in Russia and 10,000 wooden dolls per year in France. Based on the Igrushka's average cost curve, within one factory it can produce 10,000 wooden dolls at toy, produce 20,000 wooden dolls at per per toy, and produce the total of 30,000 wooden dolls at per toy.

Explanation / Answer

Within one factory it can produce 10000 wooden dolls at 7.3 per toy, produce 20000 wooden dolls at 5.5 and total of 30000 wooden dolls at 4.2 per toy.

Produce 20000 toys in Russia and 10000 toys in France=20000(5.5)+10000(7.3)=73000+110000=183000

And if produces 30000 in one factory=126000

Total cost including shipping=126000+20000=146000 when produced in Russia and export to France

Total cost including shipping=166000 when produced in France and exported to Russia

MCQ ans is B

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