12.8 Rolls-Royce Turbine Engines. Rolls-Royce is struggling with its pricing strategy with a number of its major customers in Continental Europe, particu- larly Airbus. Since Rolls-Royce is a British company ate with most manufacturing of the Airbus engines in the United Kingdom, costs are predominantly denomi- donated in British pounds. But in the period shown in table (a) below, 2007-2009, the pound steadily weakened against the euro. Rolls-Royce has tradi- Stionally denominated its sales contracts with Airbus mols in Airbus' home currency, the euro. After completing but the following table, answer the questions that follow. a. Assuming each Rolls-Royce engine marketed to Airbus is initially priced at 22.5 million, 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 22 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 200 DIT Problem 12.8: Rolls-Royce Turbine Engines (a) Date 1Q 2007 Price (millions of pounds, ) 22.50 Spot rate (euro 1.00 pound) 1.4918 Price (millions of euros, ) 33.57 20 2007 22.50 1Q 2008 22.50 2Q 2008 22.50 30 2007 22.50 1.4696 33.07 4Q 2007 22.50 1.4107 31.74 1.4733 1.3198 1.2617 33.15 29.70 28.39 3Q 2009 22.50 Date Price (millions of pounds, ) Spot rate (euro = 1.00 pound) Price (millions of euros, ) 30 2008 22.50 1.2590 28.33 4Q 2008 22.50 1.1924 26.83 10 2009 22.50 1.1017 24.79 20 2009 22.50 1.1375 25.59 4Q 2009 22.50 1.1066 24.90 1.1467 25.80