The chapters in this document are displayed in reversed order, with the last chapter appearing first. This
change ensures all chapters are included in the Solutions - Chap 2 to 17 - There is no Solutions for Ch 1
CHAPTER 17
GLOBAL BUSINESS
SOLUTIONS TO END-OF-CHAPTER QUESTIONS
REASONS FOR INTERNATIONAL TRADE
1.1 In South Korea, the opportunity cost of car assembly is 1.5 sets of components per
assembled car. In Indonesia, the opportunity cost of assembly is only one third of a
set of components. The theory of comparative advantage implies that Indonesia
would export assembled cars because it has a lower opportunity cost of assembly.
1.2 Workers in South Korea can produce components used to make cars at the rate of 6
sets of components per worker per day and can assemble cars at the rate of 4 cars
per worker per day, so 40 percent of the workers will be used to make components
and 60 percent of the workers will be used to assemble cars, resulting in total output
of 480 cars.
Workers in Indonesia can produce components at the rate of 1 set of components
per worker per day and can assemble cars at the rate of 3 cars per worker per day,
so 75 percent of the workers will be used to make components and 25 percent of the
workers will be used to assemble cars, resulting in total output of 150 cars.
An opportunity cost is the value of the best alternative use of a resource. South
Korea’s opportunity cost of assembled cars is 1.5 component sets (from 6
component sets produced per worker per day divided by 4 assembled cars produced
per worker per day). Indonesia’s opportunity cost of assembled cars is 0.333
component sets (from 1 component set produced per worker per day divided by 3
assembled cars produced per worker per day). The theory of comparative advantage
says countries should specialize in producing goods and services for which they
have a comparative advantage, which is the ability to produce a good or service at
lower opportunity cost than other countries. In this example, Indonesia’s
opportunity cost of producing assembled cars is lower in terms of component sets,
so it should produce and export assembled cars.
The 200 workers in Indonesia can assemble 600 cars (from 200 × 3). South Korea
can produce 600 components with 100 workers (from 600 assemblies divided by 6
components per worker per day in South Korea). This leaves 100 workers in South
Korea to produce components and assemble cars. Workers in South Korea can
produce components used to make cars at the rate of 6 sets of components per
worker per day and can assemble cars at the rate of 4 cars per worker per day, so 40
percent of the remaining 100 workers (40 workers, for a total of 140 workers) will
be used to make components and 60 percent of the remaining workers (60 workers)
will be used to assemble cars, resulting in additional output of 240 cars. Thus, a
total of 840 cars can be produced with trade.
369
Copyright © 2026
,370 Perloff/Brander, Managerial Economics and Strategy, Fourth Edition
1.3 The firm’s process for selecting the people with the strongest skills in those areas to
take time off from their regular tasks and work on the renovation is based on
absolute advantage: A worker has an absolute advantage over other workers if that
worker can produce more output. The theory of comparative advantage says
workers should specialize in producing goods and services for which they have a
comparative advantage, which is the ability to produce a good or service at lower
opportunity cost than other workers. In this example, it would be better for the firm
to select workers for the renovation based on their opportunity cost of renovating in
terms of their regular tasks.
1.4 Not necessarily, it is likely that as good as he was at programming that Paul Allen
was relatively even better at managing. In other words, even though Paul had an
absolute advantage in programming, he had a comparative advantage in managing.
1.5 If Carrot Patch can only sell in Malaysia and it does produce, then it will maximize
profit by producing the quantity where marginal cost equals marginal revenue.
Marginal cost (MC) is
MC = 2.
The firm’s inverse demand curve is
p = 4 − 0.001Q.
Marginal revenue (MR) has the same vertical intercept as demand with twice the
slope:
MR = 4 − 0.002Q.
Setting marginal cost equal to marginal revenue, Carrot Patch would produce
MC = MR
2 = 4 − 0.002Q
2 = 0.002Q
Q = 1,000 units.
The profit-maximizing price is
p = 4 − 0.001Q
p = 4 − 0.001(1,000)
p = $3.
Since price ($3) is greater than average variable cost ($2), the firm should produce.
Demand in Malaysia and Singapore is
Q + Q = (4,000 − 1,000p) + (4,000 − 1,000p) = 8,000 − 2,000p.
The firm’s inverse demand curve is
p = 4 − 0.0005Q.
370
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, Solutions Manual—Chapter 17/Global Business 371
Marginal revenue (MR) has the same vertical intercept as demand with twice the
slope:
MR = 4 − 0.001Q.
Setting marginal cost equal to marginal revenue, Carrot Patch would produce
MC = MR
2 = 4 − 0.001Q
2 = 0.001Q
Q = 2,000 units.
The profit-maximizing price is
p = 4 − 0.0005Q
p = 4 − 0.0005(2,000)
p = $3.
Since price ($3) is greater than average variable cost ($2), the firm should produce.
1.6 Yes, by opening up markets to its toys, Mattel (the manufacturer of Barbie dolls) is
able to enjoy economies of scale by producing large numbers of each version.
371
Copyright © 2026
, 372 Perloff/Brander, Managerial Economics and Strategy, Fourth Edition
EXCHANGE RATES
2.1 An exchange rate is the price of one currency, such as the euro, in terms of another
currency, such as the dollar. In this example, the exchange rate of euros for yen is
one euro for 132 yen (from one euro for 1.2 dollars multiplied by one dollar for 110
yen).
Arbitrage equates prices in two countries in the absence of transaction costs. If the
transaction cost is t, arbitrage moves the price in one country to within t of the price
in the other country because further arbitrage is unprofitable. If the euro-yen
exchange rate were higher than one euro for 132 yen, then euros should be
exchanged for yen because such a trade is profitable (since one euro really equals
only 132 yen).
2.2 An exchange rate is the price of one currency, such as the euro, in terms of another
currency, such as the dollar. In the figure, the quantity on the horizontal axis is the
number of euros that Americans want to buy using dollars. As X increases
(decreases), the price of a euro in terms of dollars increases (decreases), or
equivalently, the price of the dollar in terms of euros falls (rises). The price on the
vertical axis is the exchange rate, X, which is the number of dollars it takes to buy
one euro. If the U.S. government fixed exchange rates at X2, then there would be a
shortage of euros because demand for euros would exceed supply.
2.3 Managers can often increase profits by engaging in international price competition:
charging higher prices in countries where consumers have a greater willingness to
pay. However, for international price discrimination to be profitable, firms must
limit resale or arbitrage across countries. If arbitrageurs can buy the good in the
low-price country and sell it at a higher price in other countries without incurring
transaction costs, their actions eliminate the price differential. Foreign goods
shipped to the high-price country and sold outside of authorized channels of
distribution are called gray market goods. One way that a firm’s managers try to
prevent arbitrage is to permit only authorized dealers to handle their products. Any
authorized dealer that imports the product from another country instead of buying it
from the manufacturer could lose its authorization. Managers have also called upon
governments to enforce their rights under patent, trademark, and copyright. They
have also used country-specific warranties (warranties that are only good in the
country in which the manufacturer sold the good).
2.4 At the current exchange rate, Arvind will be able to exchange the $1.5 million for
99 million Indian Rupees (INR). If the exchange rate changes to 70 INR per dollar,
then Arvind will earn 105 million INR. He would break even at an exchange rate of
60 INR per dollar.
372
Copyright © 2026
change ensures all chapters are included in the Solutions - Chap 2 to 17 - There is no Solutions for Ch 1
CHAPTER 17
GLOBAL BUSINESS
SOLUTIONS TO END-OF-CHAPTER QUESTIONS
REASONS FOR INTERNATIONAL TRADE
1.1 In South Korea, the opportunity cost of car assembly is 1.5 sets of components per
assembled car. In Indonesia, the opportunity cost of assembly is only one third of a
set of components. The theory of comparative advantage implies that Indonesia
would export assembled cars because it has a lower opportunity cost of assembly.
1.2 Workers in South Korea can produce components used to make cars at the rate of 6
sets of components per worker per day and can assemble cars at the rate of 4 cars
per worker per day, so 40 percent of the workers will be used to make components
and 60 percent of the workers will be used to assemble cars, resulting in total output
of 480 cars.
Workers in Indonesia can produce components at the rate of 1 set of components
per worker per day and can assemble cars at the rate of 3 cars per worker per day,
so 75 percent of the workers will be used to make components and 25 percent of the
workers will be used to assemble cars, resulting in total output of 150 cars.
An opportunity cost is the value of the best alternative use of a resource. South
Korea’s opportunity cost of assembled cars is 1.5 component sets (from 6
component sets produced per worker per day divided by 4 assembled cars produced
per worker per day). Indonesia’s opportunity cost of assembled cars is 0.333
component sets (from 1 component set produced per worker per day divided by 3
assembled cars produced per worker per day). The theory of comparative advantage
says countries should specialize in producing goods and services for which they
have a comparative advantage, which is the ability to produce a good or service at
lower opportunity cost than other countries. In this example, Indonesia’s
opportunity cost of producing assembled cars is lower in terms of component sets,
so it should produce and export assembled cars.
The 200 workers in Indonesia can assemble 600 cars (from 200 × 3). South Korea
can produce 600 components with 100 workers (from 600 assemblies divided by 6
components per worker per day in South Korea). This leaves 100 workers in South
Korea to produce components and assemble cars. Workers in South Korea can
produce components used to make cars at the rate of 6 sets of components per
worker per day and can assemble cars at the rate of 4 cars per worker per day, so 40
percent of the remaining 100 workers (40 workers, for a total of 140 workers) will
be used to make components and 60 percent of the remaining workers (60 workers)
will be used to assemble cars, resulting in additional output of 240 cars. Thus, a
total of 840 cars can be produced with trade.
369
Copyright © 2026
,370 Perloff/Brander, Managerial Economics and Strategy, Fourth Edition
1.3 The firm’s process for selecting the people with the strongest skills in those areas to
take time off from their regular tasks and work on the renovation is based on
absolute advantage: A worker has an absolute advantage over other workers if that
worker can produce more output. The theory of comparative advantage says
workers should specialize in producing goods and services for which they have a
comparative advantage, which is the ability to produce a good or service at lower
opportunity cost than other workers. In this example, it would be better for the firm
to select workers for the renovation based on their opportunity cost of renovating in
terms of their regular tasks.
1.4 Not necessarily, it is likely that as good as he was at programming that Paul Allen
was relatively even better at managing. In other words, even though Paul had an
absolute advantage in programming, he had a comparative advantage in managing.
1.5 If Carrot Patch can only sell in Malaysia and it does produce, then it will maximize
profit by producing the quantity where marginal cost equals marginal revenue.
Marginal cost (MC) is
MC = 2.
The firm’s inverse demand curve is
p = 4 − 0.001Q.
Marginal revenue (MR) has the same vertical intercept as demand with twice the
slope:
MR = 4 − 0.002Q.
Setting marginal cost equal to marginal revenue, Carrot Patch would produce
MC = MR
2 = 4 − 0.002Q
2 = 0.002Q
Q = 1,000 units.
The profit-maximizing price is
p = 4 − 0.001Q
p = 4 − 0.001(1,000)
p = $3.
Since price ($3) is greater than average variable cost ($2), the firm should produce.
Demand in Malaysia and Singapore is
Q + Q = (4,000 − 1,000p) + (4,000 − 1,000p) = 8,000 − 2,000p.
The firm’s inverse demand curve is
p = 4 − 0.0005Q.
370
Copyright © 2026
, Solutions Manual—Chapter 17/Global Business 371
Marginal revenue (MR) has the same vertical intercept as demand with twice the
slope:
MR = 4 − 0.001Q.
Setting marginal cost equal to marginal revenue, Carrot Patch would produce
MC = MR
2 = 4 − 0.001Q
2 = 0.001Q
Q = 2,000 units.
The profit-maximizing price is
p = 4 − 0.0005Q
p = 4 − 0.0005(2,000)
p = $3.
Since price ($3) is greater than average variable cost ($2), the firm should produce.
1.6 Yes, by opening up markets to its toys, Mattel (the manufacturer of Barbie dolls) is
able to enjoy economies of scale by producing large numbers of each version.
371
Copyright © 2026
, 372 Perloff/Brander, Managerial Economics and Strategy, Fourth Edition
EXCHANGE RATES
2.1 An exchange rate is the price of one currency, such as the euro, in terms of another
currency, such as the dollar. In this example, the exchange rate of euros for yen is
one euro for 132 yen (from one euro for 1.2 dollars multiplied by one dollar for 110
yen).
Arbitrage equates prices in two countries in the absence of transaction costs. If the
transaction cost is t, arbitrage moves the price in one country to within t of the price
in the other country because further arbitrage is unprofitable. If the euro-yen
exchange rate were higher than one euro for 132 yen, then euros should be
exchanged for yen because such a trade is profitable (since one euro really equals
only 132 yen).
2.2 An exchange rate is the price of one currency, such as the euro, in terms of another
currency, such as the dollar. In the figure, the quantity on the horizontal axis is the
number of euros that Americans want to buy using dollars. As X increases
(decreases), the price of a euro in terms of dollars increases (decreases), or
equivalently, the price of the dollar in terms of euros falls (rises). The price on the
vertical axis is the exchange rate, X, which is the number of dollars it takes to buy
one euro. If the U.S. government fixed exchange rates at X2, then there would be a
shortage of euros because demand for euros would exceed supply.
2.3 Managers can often increase profits by engaging in international price competition:
charging higher prices in countries where consumers have a greater willingness to
pay. However, for international price discrimination to be profitable, firms must
limit resale or arbitrage across countries. If arbitrageurs can buy the good in the
low-price country and sell it at a higher price in other countries without incurring
transaction costs, their actions eliminate the price differential. Foreign goods
shipped to the high-price country and sold outside of authorized channels of
distribution are called gray market goods. One way that a firm’s managers try to
prevent arbitrage is to permit only authorized dealers to handle their products. Any
authorized dealer that imports the product from another country instead of buying it
from the manufacturer could lose its authorization. Managers have also called upon
governments to enforce their rights under patent, trademark, and copyright. They
have also used country-specific warranties (warranties that are only good in the
country in which the manufacturer sold the good).
2.4 At the current exchange rate, Arvind will be able to exchange the $1.5 million for
99 million Indian Rupees (INR). If the exchange rate changes to 70 INR per dollar,
then Arvind will earn 105 million INR. He would break even at an exchange rate of
60 INR per dollar.
372
Copyright © 2026
