{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}


460casestudy#1 - Economics 460 Case 1 Protecting your...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Economics 460 Case 1: Protecting your Hard-Won European Profits Answer sheet 1. How do fluctuations in the exchange rate affect Lenovo profitability? Explain, using part A as your example. (Be sure to define profitability.) As we saw in part A, the Lenovo Corporation has profits of $26.6 million when price is 4000 euros and the exchange rate is 1.40 per euro. It has profits of $15.4 million with the same euro price and an exchange rate of $1 per euro. In general, depreciation of the exchange rate will lead to increased profits while appreciation leads to decreased profits. The reason for this? All production costs are in dollars. A stronger dollar leads to lower per-unit revenue in dollars but the same per-unit cost. We also saw in part A that Lenovo changed its profit-maximizing price once the exchange rate appreciated. Rather than selling at 4000 euros, it chose to sell fewer at 5000 euros. This led to profits of $16 million. Lenovo chose to pass on some of the relatively higher costs (when denominated in euros) in higher euro prices to the purchaser, even though this leads to less quantity demanded.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}