Question 1 PART A (11 points) Consider the operations of Asahi Beverages of Australia in Poland. It produces all its soft drinks (e.g., Solo, Schweppes Lemonade) in Poland and all of its costs of production are at local Polish prices. It sells some fraction of its output to Poland and some fraction to Czech Republic. See the following information below. Sales: 600,000 cans in Poland and 400,000 cans in Czech Republic Price per can of Solo: 1 zloty in Poland and 2koruna in Czech Republic Cost of manufacturing a can of Solo: 0.5 Polish zloty Nominal exchange rate relative to the AUD: Poland - 1 zloty/Australian dollar Czech Republic - 2 koruna/Australian dollar (a) Calculate the Australian dollar profits of Asahi Beverages of Australia. (1) (b) Following a currency crisis in Poland the zloty devalued to 3 zloty to the dollar. Recalculate the profits for Asahi Beverages. Have the profits declined or increased? (1) (c) Suppose Poland and the Czech Republic have a free-trade agreement. Following the zloty's devaluation, Asahi Beverages can decide to relocate its sales between Poland and Czech Republic to maintain the same level of dollar profits as in part (a). What amount of relocation of sales will give them the original level of profits (assume that the total sales volume is unchanged at 1m cans of Solo and the local prices and costs of production are unchanged)? Explain clearly. (2.5) (d) Alternatively, Asahi can try to negotiate the lowering of wages of their Polish workers. What should the new cost of production be to maintain the level of profits in part (a) and given no change in the relocation of sales. All other information stays the same. (2.5) (e) Compare the two options in (c) and (d) and comment on which one is more feasible, and the possible obstacles Asahi could face to implementing them. (4; Max 200 words) Question 1 PART A (11 points) Consider the operations of Asahi Beverages of Australia in Poland. It produces all its soft drinks (e.g., Solo, Schweppes Lemonade) in Poland and all of its costs of production are at local Polish prices. It sells some fraction of its output to Poland and some fraction to Czech Republic. See the following information below. Sales: 600,000 cans in Poland and 400,000 cans in Czech Republic Price per can of Solo: 1 zloty in Poland and 2koruna in Czech Republic Cost of manufacturing a can of Solo: 0.5 Polish zloty Nominal exchange rate relative to the AUD: Poland - 1 zloty/Australian dollar Czech Republic - 2 koruna/Australian dollar (a) Calculate the Australian dollar profits of Asahi Beverages of Australia. (1) (b) Following a currency crisis in Poland the zloty devalued to 3 zloty to the dollar. Recalculate the profits for Asahi Beverages. Have the profits declined or increased? (1) (c) Suppose Poland and the Czech Republic have a free-trade agreement. Following the zloty's devaluation, Asahi Beverages can decide to relocate its sales between Poland and Czech Republic to maintain the same level of dollar profits as in part (a). What amount of relocation of sales will give them the original level of profits (assume that the total sales volume is unchanged at 1m cans of Solo and the local prices and costs of production are unchanged)? Explain clearly. (2.5) (d) Alternatively, Asahi can try to negotiate the lowering of wages of their Polish workers. What should the new cost of production be to maintain the level of profits in part (a) and given no change in the relocation of sales. All other information stays the same. (2.5) (e) Compare the two options in (c) and (d) and comment on which one is more feasible, and the possible obstacles Asahi could face to implementing them. (4; Max 200 words)
