Problem 2 20 points

HP a US based corporation exports computer printers to Brazil, whose currency, the reais (symbol R$) has been trading at R$3.40/US$. Exports to Brazil are currently 50,000 printers per year at the reais equivalent of $200 each. A strong rumor exists that the reais will be devalued to R$4.00/$ within two weeks by the Brazilian government. Should the devaluation take place, the reais is expected to remain unchanged for another decade. Accepting this forecast as given, HP faces a pricing decision which must be made before any actual devaluation: HP may either (1) maintain the same reais price and in effect sell for fewer dollars, in which case Brazilian volume will not change, or (2) maintain the same dollar price, raise the reais price in Brazil to compensate for the devaluation, and experience a 20% drop in volume. Direct costs in the U.S. are 60% of the U.S. sales price.

What would be the short-run (one-year) implication of each pricing strategy? Which do you recommend?