For your next white paper for company deployments, you have
For your next white paper for company deployments, you have
been asked to write about trade, cost, and price using your work in Acme Mexico
as one example.
Multinational corporations are continually seeking sources
of comparative advantage by investing in developing countries. Sometimes, they
are initially willing to pay a high price for that advantage. For example, U.S.
tobacco companies create strong incentives for local farmers in developing
countries to grow tobacco instead of crops used for domestic food production by
offering underwritten loans, subsidies for startup costs, and a guaranteed
demand for their tobacco crops. The following questions pertain to the
foundations of modern trade theory and comparative cost of production and
pricing decisions:
Explain why the U.S. would subsidize the short run costs of
production for tobacco farmers in foreign countries. Do these practices
guarantee the tobacco farmers a profit in the short run? Long run? Explain.
How does this practice shift the equilibriums (price and
output) for tobacco and domestic food items (analyze both the local and
international effects)?
In the case with Acme Motors, what are the production gains
to the entire company from the facility in Nuevo Laredo, Tamaulipas
specializing in Autoturbo Quattro engines (i.e., why do they just make engines
in Nuevo Laredo rather than the entire auto)?
Why would Acme Motors shift its production of engines from
Detroit to Mexico and then shift the engines back to the U.S. to be assembled
into the finished auto?
What are the gains and losses for consumers in these types
of international production and trading patterns?
