Question

If the domestic price in Canada is $0.75 and the domestic price in the United States is $1.00, what will Canadian companies do?

A. Produce more than Canadian customers will buy and sell the surplus to the United States
B. Increase production but experience decreasing profits
C. Continue to produce at their usual rate and sell mostly to Canadian customers
D. Produce less than Canadian customers will buy and import additional product from the United States

Answer 1

The correct answer is option A. Produce more than Canadian customers will buy and sell the surplus to the United States.

Step-by-step explanation:

The situation described in the question involves a scenario where the domestic price for a good in Canada is $0.75, while it is $1.00 in the United States. Considering the principles of international trade and arbitrage, Canadian companies would likely produce more than Canadian customers will buy and sell the surplus to the United States, where they can obtain a higher price.

Arbitrage ensures that if there is a price differential between two countries for the same good, there will be an incentive for businesses to buy the product in the country where it is cheaper and sell it in the country where it is more expensive. This activity would continue until the price difference is eliminated or is no longer large enough to justify the costs of trading internationally.

Therefore, option A, Produce more than Canadian customers will buy and sell the surplus to the United States, is the most likely response by Canadian companies.