Economics Case Study Regress

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Question 1: Economics/Quantitative Analysis

Part 1 (40%)
A. The focus of the study is Petra Furniture's expansion in the U.S. market vis-à-vis in the Canadian market. How, in the very first instance, would you have thought through this problem in terms of "opportunity cost"? (No calculations needed; provide only a conceptual answer.) (100 words)

Opportunity cost is defined to be the cost of the highest valued alternative foregone to perform some action. In this case the opportunity cost of expansion in the US market is the reduced expansion in the Canadian market. There is a limited amount of resources that the company has access to and any effort to increase presence in the US market will come at the cost of the presence in the largest market for the company which happens to be the Canadian market. In the case study they talk about 201% growth in the US sales of the company, and in the same duration Canadian sales rose by 213%. Given that the base of start was higher in Canada the company has performed much better in Canada than in the US.

B. In the management group meeting the whole discussion focuses on expansion either entirely in the U.S. market or entirely in the Canadian market. Discuss, in light of your knowledge of Managerial Economics, why part expansion in the U.S. market and part expansion in the Canadian market should also have been discussed and examined. (Only a conceptual answer is expected.) (100 words)

The most important reason for discussing part expansion in both markets is that it leads to some diversification of risk. As stated in the first part during the last 5 years US sales of the company rose 201%, while Canadian sales rose 213%. With a bigger base this implies that the Canadian market performed better. It is also given that in the US market the company operates through B dealers, while in Canada they operate through A dealers. Thus as of now the Canadian market offers them better strength. But, the US market is the world's largest market and you can ignore that at your own peril.

Another issue that comes up is that the company's presence in the US market comes with huge forex risks. The production is all being done in Canada and products are priced in US dollars in the US market thus putting the risk of any fluctuations in the exchange rate on the company.

Together this means that the company should diversify its position in both markets so that it has a footfall in the largest market but also has its bread and butter Canadian market for support.

C. What type of market environment does Petra face in the U.S. and Canada? Why do you think this is an important issue for Petra's expansion in either country? (100words)

The company faces a fairly competitive market in both countries. The entry and exit costs are low in the industry and there are a large number of companies ...