Question

Consider a firm that sells its product in both the U.S. and the U.K. u.s. demand is for ​units, and the U.S. production capacity is units. demand in the U.K. is for ​units, and the U.K. production capacity is units. production cost in the U.S. is ​$​, and production cost in the U.K. is ​£. the current exchange rate is ​$ ​= £1. the shipping cost is ​$ per unit for any units shipped between the two countries. sales prices equate to ​$ in each country.

How many should be made in each​ country?
U.S.​ = ____ units.
U.K.​ = ____ units.

Answer 1

The production quantity in each country for a firm that sells internationally should be guided by a combination of production and shipping costs, as well as how exchange rates influence foreign pricing and demand.

Step-by-step explanation:

The determination of what quantity of products should be made in each country by a firm involves analyzing production costs, exchange rates, and shipping costs. When a product, like a Ford pickup truck, is sold in international markets, its price in the foreign country is affected by the exchange rate between the currencies of the two countries involved. A change in the exchange rate can make exports more or less expensive for foreign buyers, affecting demand.

For instance, a truck costing $25,000 in the U.S. would be priced at £19,231 in the U.K. if the exchange rate is $1.30 to £1. However, if the dollar weakens and the pound strengthens to $2 per pound, the truck's U.K. price drops to £12,500, potentially increasing demand. Understanding these financial factors, along with shipping fees, allows a firm to decide how much of its product to manufacture in the U.S. and the U.K. to minimize costs and maximize profit.