DeutschAuto is a German automaker that pays for most of its production costs in euros. Suppose that in 2005, DeutschAuto's cost of producing a car was € 25,000 and the company sold the car in the United States for $38,000. The dollar euro exchange rate rose from 1.15$/€ in 2005 to 1.35 $/€ in 2007. DeutschAuto's euro cost of production did not change, and the company continued to charge $38,000 for its car in the United States, as DeutschAuto believes this is its profit maximizing price. Examine how the rise in the dollar euro exchange rate affects DeutschAuto's profits from sales in the United States.

1. Suppose that you go on vacation to Canada every summer. Last year, the hotel room where you stayed cost C$110 per night, and it costs the same this year. The exchange rate was 0.86 US$/C$ last year, and it is 1.02 US$/C$ this year. This means you will pay ____ per night this year than you paid last year.

A. $17.60 more

B. $17.60 less

C. $8.10 less

D. $8.10 more

2. The u.s dollar Canadian dollar exchange rate is essentially the price of a Canadian dollar in terms of U.S dollar. Thus, from your analysis you can conclude that when the Canadian dollar appreciates against the U.S dollar, Canadian goods and services become ____ expensive for Americans.

A. Less

B. More

3. In 2005, DeutschAuto's revenue from sales in the United States was ____per car.

A. € 28,148

B. € 43,700

C. € 33,043

D. € 22,174

Given the cost of production, this means that DeutschAuto's profit was ____ per car.

A. € 7,543

B. € 33,043

C. € 18,200

D. € 2,648

4. In 2007, DeutschAutos's revenue from sales in the United States was _____ per car.

A. €18,889

B. € 33,043

C. € 51,300

D. € 28,148

Given the cost of production, this means that DeutschAuto's profit was ____per car.

A. €7,543

B. € 28,148

C. € 2,648

D. € 25,800

5. The dollar euro exchange rate is essentially the price of one euro in terms of dollars. When this price rises, the euro is said to appreciate against the dollar. This, from your analysis, you can conclude that when the euro appreciates against the dollar, it becomes ____ for European companies to profit from exporting their products to the United States.

A. More difficult

B. Easier