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Consider an US firm that imports components from China, and adds value by assembling these components into a finished product in the US. Assume that...

  1. Consider an US firm that imports components from China, and adds value by assembling these components into a finished product in the US. Assume that the US firm always pays in US$ for the components. Suppose the cost of imported components is $5, while domestic assembly costs to finish the product are $5, and the current exchange rate is RMB5/$.


 a) Case A: If the US firm was selling 100% of the finished product output in the domestic US market at $12/unit, what is the margin of the US firm as a % of revenue?

b) Case B: If the US firm was exporting 100% of the finished product output to Eurozone markets and gets paid €12/unit in Euros, and the exchange rate is $1/€, what is the margin of the US firm as % of revenue?

C) Case C: In case A above, if the exchange rate changed to RMB 6/$, and all the other numbers and variables remain constant, what is the margin of the US firm as % of revenue?

d)       Case D: In case B above, if the exchange rate changed to $0.9/€, and all the other numbers and variables remain constant (RMB5/$), what is the new margin of the US firm as % of revenue.

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