# Economics Harvard Case Solution & Analysis

Question1

(a) Opportunity cost is the value of an alternative product forgone for the production of another product. Here the opportunity cost of producing a plastic toy is 0.67 electronic toys and the opportunity cost of producing an electric toy is 1.5 plastic toys in Pakistan. However, the opportunity cost of producing a plastic or an electronic toy is 1 for both (Refer exhibit#1).

(b) It will not be preferred to move both the products to Pakistan. The opportunity cost of producing plastic toys in Pakistan is 0.67 whereas;  in America the opportunity cost of producing plastic toys is 1. It will be preferred to produce plastic toys in Pakistan and not in America.

The production of electronic toys is better in America and it is preferred that electronic toys would be produced in America as the opportunity cost of producing electronic toys in America is 1 and in Pakistan the opportunity cost of producing electronic toys is 1.5(Refer exhibit#1).

(c) When analyzing the table and calculating it with wage rates available of Pakistan and America, it can be recommended to move both the products to Pakistan as when producing in Pakistan the opportunity cost in value in Pakistan for plastic toy is \$3.33 while in America it is \$9.00 per toy.

When producing in Pakistan, the opportunity cost in value for electric toy is \$7.50, while in America the opportunity cost of producing an electronic toy is \$9.00.

Therefore,it is suggested that the CEO should move its production units to Pakistan to lose less opportunity cost while producing in Pakistan (Refer exhibit#2).

C.(1)When the wage rate increases from \$5 to \$6, then it will be preferred to move plastic toys to Pakistan and let the electric toys to remain in America. Electric toys, both in Pakistan and in America, are being produced at \$9 therefore;moving electric toys to Pakistan will make the company bare extra cost.As a result,it is preferred to produce electric toys in America only. (Refer exhibit#3)

C.(2) In the current situation, it is optical to produce both the products in Pakistan because the opportunity cost of producing both the products at current wage rate in Pakistan is less than the opportunity cost of producing in America.(Refer exhibit#2)

(d) When the current exchange rate increases, it will be beneficial for the CEO to produce both the products in America. If the exchange rate falls, then the CEO has to analyze the situation. It is concluded that if the exchange rate falls up to 16 rs,then it will be preferred to produce plastic toys in Pakistan and electric toys in America. By producing plastic toys in Pakistan makes the CEO be aran opportunity cost of \$4.17 and in America the opportunity cost would be \$9.00. However,producing electric products in America has the opportunity cost of \$9.00 and in Pakistan, this opportunity cost rises to \$9.38.

Therefore,it will be preferred to produce plastic toys in Pakistan and electric toys in America.(Refer exhibit#4)

Question2

Scenario1

(a)If there are no free trade agreements, then the US consumers should buy the products from the US producers as they are offering their products at \$8. If Mexico and China are considering purchasing, then they will be expensive to the US consumers as Mexico is offering a price of \$6 plus tariff of \$5, which makes it \$11 per product, and the US consumers will be paying \$3 more for the same product. If considering China for the purchase, then it is offering its product at \$4 plus tariff of \$5, which makes it \$9 per product making the US consumers pay \$1 extra for the same product.(Refer exhibit#5)

(b)If NAFTA is signed, then the US consumers will buy products from Chinese producers as they are offering their products at \$4 while US producers are offering at \$8 and Mexico producers are offering at \$6.(Refer exhibit#5)

(c)If NAFTA is signed, then the US consumers will be paying less for the products as US producers are charging \$8 for their products and China is charging \$4 for the same product. There are two major effects of NAFTA on the country.

1- The country will be losing the revenue from tariff on the import of goods.

2- The US producers will lose their market share as no one will be willing to buy products on high prices from US producers. The industry of this product will make loss and will ultimately vanish from the industry as they are not competent enough to compete with China................................

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