Rolls-Royce Turbine Engines. Rolls-Royce is struggling with its pricing strategy with a number of its major customers in Continental Europe, particularly Airbus. Since Rolls-Royce is a British company with most manufacturing of the Airbus engines in the United Kingdom, costs are predominantly denominated in British pounds. But in the period shown in table

(a) at the top of this page, 2007–2009, the pound steadily weakened against the euro. Rolls-Royce has traditionally denominated its sales contracts with Airbus in Airbus’ home currency, the euro. After completing the table answer the following questions:

a. Assuming each Rolls-Royce engine marketed to Airbus is initially priced at £22.5 million each, how has the price of that engine changed over the period shown when priced in euros at the current spot rate?

b. What is the cumulative percentage change in the price of the engine in euros for the three-year period?

c. If the price elasticity of demand for Rolls-Royce turbine sales to Airbus is relatively inelastic, and the price of the engine in British pounds never changes over the period, what does this price change mean for Rolls-Royce’s total sales revenue on sales to Airbus of this engine?

d. Compare the prices and volumes for the first quarter of each of the three years shown in table

(b) below. Who has benefitted the most from the exchange rate changes?

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(a) Date 1Q 2007 2Q 2007 3Q 2007 4Q 2007 1Q 2008 2Q 2008 Price (millions of pounds, ) 22.50 22.50 22.50 22.50 22.50 22.50 Spot rate (euro 1.00 pound) 1.4918 1.4733 1.4696 1.4107 1.3198 1.2617 Price (millions of euros, ) 33.57 Date 3Q 2008 4Q 2008 1Q 2009 2Q 2009 3Q 2009 4Q 2009 Price (millions of pounds, ) 22.50 22.50 22.50 22.50 22.50 22.50 Spot rate (euro 1.00 pound) 1.2590 1.1924 1.1017 1.1375 1.1467 1.1066 Price (millions of euros, )