Orange tail. Suppose that Orange tail, an Australian-based vineyard, sells in two different markets: Australia and the US. It is estimated that the price elasticity of demand in the US is 4, whereas the price elasticity of demand in Australia is -2.

(a) Why would the value of the price elasticity of demand be higher (in absolute value) in the US? 5.3. OUTPUT LEVEL AND PRICE 212

(b) If Orange tail wants to maximize total profits, should the US price be higher or lower than the Australia price? (Hint: this is a trick question; the answer depends on the cost of producing and delivering to the US vis--vis the cost of producing and delivering to Australia.)

(c) Based on the previous answers, explain in words some of the main factors determining the relation between domestic prices and export prices.