ECO question 13 in HSC 1999 (1 Viewer)

[jk]

the question is following;

A depreciation of australian dollar assists import competing firms when..?

a. imports are relatively price elastic
b. the number of import competing firms is reduced
c. the costs of import competing firms increase
d. imports are relatively price inelastic


i think it's (d) cuz depreciation makes imports more expensive, and import competing firms still could enjoy higher profit with small change in the level of demand if imports are relatively price inelastic...

but the answer is (a)

can anybody plz help me out??

 

[Nick]

im pretty sure its A because if the imports are price elastic and there is a change in price, then consumers will buy domestic good instead of imports..

 

[Nick]

if imports are price inelastic and there was an increase in price (due to the depreciation) then it wouldnt change the demand for the imports drastically, and wouldnt really help the domestic import competing industries..

 

[jk]

sorry nick i don get it still......

"if the imports are price elastic and there is a change in price, then consumers will buy domestic good instead of imports.."

if consumers buy domestic goods instead of imports, how would this help import competing companies?? aren they likely to lose their profit???

n e way thanks for ur help mate

 

[Nick]

no prob.. "import competing companies" are domestic companies that sell something that can also be imported. so if price of imports goes up, then domestic market will demand more of the cheaper domestic good.

 

[Bambul]

That's the one. Import competing companies are companies that compete with imported goods (eg. Australian beef farmers compete with beef imports from USA). If the AUD depreciates and demand for these imports/goos is inelastic, then the increase in the price can be passed on to consumers. If it is elastic, then there will be a larger decrese in the quantity of imports demanded by consumers from the same price increse. As a result, domestic import competing companies will benefit more from a depreciation in the AUD if the imports' demand is elastic.

 

[jk]

ah~~~~~ now i got that...

i thought "import competing firms" were those companies that actually import something from overseas and sell it to domestic market.....

thanks for both of u nick and bambul