B A domestic shoe company distributes running shoes and tenn

B. A domestic shoe company distributes running shoes and tennis shoes for $95 per pair to it domestic shoe retailers. The marginal cost of producing a pair of running shoes is S60 and the marginal cost of producing a pair of tennis shoes is $45. Ignore any potential issues of bundling the two types of shoes together as part of the sale and any competitive effects that international sales might have on current domestic sales. A Chinese retailer offers to purchase running shoes for $55 per pair and tennis shoes for $55 per pair, for distribution in China. Q5. Is the marginal revenue from selling running shoes to the Chinese retailer greater or less than its marginal cost? Q6. Should the shoe company sell running shoes to the Chinese retailer? Q7. Is the marginal revenue from selling tennis shoes to the Chinese retailer greater or less than its marginal cost? Q8. Should the chose company sell tennis shoes to the Chinese retailer? Q9. Suppose the domestic shoe company has a maximum capacity of 50,000 pairs of running shoes and 50,000 pairs of tennis shoes in total, of which 45,000 pairs of running shoes and 45,000 pairs of tennis shoes can be sold to domestic retailers. How would you allocate the supply of shoes if the Chinese retailer offers to purchase 15,000 of running shoes and 15,000 pairs of tennis shoes?

Solution

SOLUTION:

Domestic sell

Production cost

Profit

Remarks

Both shoes (95+95)=190

60+45=105

190-105=$85

He would sell to domestic retailer

Sell to Chinese buyer

55+55=110

60+45=105

110-105=$5

He would not sell to Chinese buyer

Q6.     Should the shoe company sell running shoes to the Chinese retailer?

Answer No shoe company will not sell to Chinese retailer

Explaination : profit is less comparison to domestic selling. Or Chinese retailer is purchasing company good lower price than in the domestic market and it is less than the marginal cost of production so shoe company will not sell below the marginal cost condition. Loss will incur to company if he only sell running shoe (95-55)=$45

Q8.     Should the chose company sell tennis shoes to the Chinese retailer?

Answer No shoe company will not sell to Chinese retailer

Explaination: profit is less comparison to domestic selling. Or Chinese retailer is purchasing company good lower price than in the domestic market and no doubt it is paying more than the marginal cost of production even though shoe company will not sell because loss will incur to company if he only sell tennis shoes (95-55)=$45

Q9.             Answer

Selling price

Total cost

Profit

Remarks

95*45000=4275000

95*45000=4275000

                   8550000

45000*60=2700000

45000*45=2025000

                    4725000

8550000-4725000=3825000

(15000+15000)*55=

1650000

15000*60=900000

15000*45=675000

                    1575000

1650000-1575000=75000

               

        

  

      Shoe company will not sell to Chinese retailer.

Domestic sell	Production cost	Profit	Remarks
Both shoes (95+95)=190	60+45=105	190-105=$85	He would sell to domestic retailer
Sell to Chinese buyer
55+55=110	60+45=105	110-105=$5	He would not sell to Chinese buyer