Question

13. A company manufactures and sells android phones for $600. They are currently $100 below the price of their competitors. If the exchange rate charges from $1.20/ Euro to $1.15/ Euro, what will happen? a. The firm price in the U.S will rise, and they will lose their price advantage b. The price in the U.S. will rise but they keep some of their advantage c. the price in the U.S will fall, and they will increase their price advantage d. remain the same as the exchange rate does not affect the product’s price in the U.S.

Answer 1

If exchange rate is $ 1.20/Euro;

loss in Euro due to low price compare to competitor = $ 1 00 x 1/1.2 = Euro 83.33

If exchange rate is $ 1.15/Euro;

loss in Euro due to low price compare to competitor = $ 1 00 x 1/1.15 = Euro 86.96

Additional loss in Euro , if exchage rate is changed from $ 1.20/Euro to $ 1.15 /Euro = 86.96 - 83.33 = Euro 3.63

Then , the price in US = $ 600 + (Euro 3.63 x $ 1.15) = $ 604.17

Therefore,

The price in the U.S. will rise but they keep some of their advantage