2. A monopolist sells goods in a domestic market and a foreign market. These markets are segmented. The (inverse) demand curves are identical in the two markets and are structured as follows; = K - BQ K - BQ* P* = where variables superscripted with a * refer to the foreign market. All units of the good are produced domestically and have a marginal cost of C. There are no fixed costs. The exchange rate, equal to the price of one unit of foreign currency in terms of domestic currency, is S. a) Derive an analytical expression for the profit maximising price and quan- tity in each market and for total profits. [40 marks] b) Use your previous results to explain how an appreciation in S will affect pricing in the foreign market and quantity sold. (15 marks] c) Illustrate your results from (a) and (b) by considering a situation where K = 10,000, C = 2,000, B = 2 and where S increases from 1 to 1.25. [15 marks] e) What are the implications of your analysis in (c) for exchange rate pass through and the law of one price in this setting? (15 marks] e) What determines the extent to which exchange rate changes are passed to foreign consumers in this model? (15 marks]