According to the cost-based definition of dumping dumping occurs when a firm sells a product abroad at a price that is less than
|a. average total cost|
b. average variable cost
c. average fixed cost
d. marginal cost
The Correct Answer Is:
- a. average total cost
The correct answer is a. average total cost. According to the cost-based definition of dumping, dumping occurs when a firm sells a product abroad at a price that is less than the average total cost of producing that product.
This practice can have significant implications for international trade and competition. Let’s explore in detail why this answer is correct and why the other options are not accurate descriptions of dumping according to the cost-based definition.
a. Average Total Cost (Correct Answer):
1. Cost-Based Definition of Dumping:
The cost-based definition of dumping is one of the approaches used to determine whether a firm is engaged in unfair trade practices. According to this definition, dumping occurs when a company exports a product to a foreign market at a price below its average total cost of production.
Average total cost includes all costs associated with producing a unit of the product, including both variable and fixed costs.
2. Impact on Competition:
Selling a product at a price below the average total cost can be anti-competitive and detrimental to local industries in the importing country. This is because the exporting firm may be able to flood the market with cheaper products, making it difficult for local producers to compete and potentially leading to job losses and industry consolidation.
3. Anti-Dumping Measures:
When dumping is suspected, the importing country may impose anti-dumping duties or tariffs to offset the price advantage created by selling below average total cost. These measures are intended to level the playing field and protect local industries from unfair competition.
Now, let’s discuss why the other options are not correct:
b. Average Variable Cost:
Selling a product at a price below the average variable cost, while financially unsustainable in the long run, does not meet the cost-based definition of dumping. Variable costs include expenses that vary with the level of production, such as labor and materials.
Dumping, according to the cost-based definition, considers all costs, including both variable and fixed costs, which are incorporated in the average total cost.
c. Average Fixed Cost:
Average fixed costs are not considered in the cost-based definition of dumping because they do not directly impact a firm’s pricing decisions for its products. Fixed costs, such as rent and depreciation, remain relatively constant regardless of the level of production.
Dumping is assessed based on the relationship between the product’s selling price and the total cost of production, which includes both variable and fixed costs.
d. Marginal Cost:
The marginal cost represents the additional cost incurred when producing one more unit of a product. Dumping is not determined based on the marginal cost of production. Instead, it focuses on the average total cost, which considers all costs associated with the production of the product and is used to assess whether the selling price is below this comprehensive cost measure.
In summary, the cost-based definition of dumping, as outlined in option a, is the accurate description of dumping in the context of international trade. It is when a firm exports a product to a foreign market at a price that is less than the average total cost of producing that product.
This practice is subject to anti-dumping measures to protect local industries from unfair competition. The other options do not align with this specific definition of dumping and represent different cost measures that are not used to assess dumping practices.