Question 2 (15 marks) Consider Coca-Cola's operations in Argentina. Coke produces all its output in Argentina and all of it costs of production are at local Argentinean prices. It sells some fraction of its output to Argentina and some fraction to Brazil. See the following information below. Sales: 600,000 cans to Argentina and 400,000 cans to Brazil Price per can of coke: 1 peso in Argentina and 2 real in Brazil Cost of manufacturing a can of coke: 0.5 Argentinean peso Nominal exchange rate relative to the US$: Argentina - 1peso/dollar Brazil - 2 real/dollar (a) Calculate the dollar profits of coke. (1) (b) Following a currency crises in Argentina the peso devalued to 3peso to the dollar. Recalculate the profits for coke. Have the profits declined or increased? (1) (C) Suppose Argentina and Brazil are a part of Mercosur, which is a free trade agreement between four Latin American countries, Coke can decide to relocate its sales between Argentina and Brazil so as to maintain the same level of dollar profits as it 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 Im cans of coke and the local prices and costs of production are unchanged). Explain clearly. (4) (d) Alternatively, they can try to negotiate the lowering of wages of their Argentinian 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. (4)