Question $5$

Rococo, Inc. of France exports leather couches to Turkey, whose currency, the lira $($TRY$),$ has been trading at TRY$29\mathrm{.}7/.$ Exports to Turkey are currently $40,000$ couches per year at the lira equivalent of $1,200$ each. A strong rumor exists that the lira will be depreciated to TRY$32\mathrm{.}0/.$ Should the depreciation take place, the lira is expected to remain unchanged for a long period of time.

Accepting this forecast as given, Rococo faces a pricing decision that must be made before any actual depreciation: Rococo may either $(1)$ maintain the same lira price and in effect sell for fewer euros, in which case Turkish volume will not change, or $(2)$ maintain the same euro price, raise the lira price in Turkey to compensate for the depreciation, and experience a $20\%$ drop in volume. Direct costs in France are $50\%$ of the French sales price. What would be the short$-$run $($one$-$year$)$ implication of each pricing strategy? Which do you recommend?

$\backslash$table$[[,,,$Exchange rate,,Prices in$],[$Assumptions$,$Euro prices,,$($TRY$/),,$Turkish lira$],[$Existing sales price per unit,$1,200\mathrm{.}00,,29\mathrm{.}700,,35,640],[$If the lira falls in value, the new implied euro price:$],[$New euro price if no lira price change,$1,113\mathrm{.}75,$larr,$32\mathrm{.}000,$larr,$35,640],[$If the euro price is changed to keep euro price:$],[$New lira price is current euro price at new exchange rate:,$1,200\mathrm{.}00,,32\mathrm{.}000,,38,400],[$Direct cost per unit in France, percent of price,$50\%,,,,],[$Direct cost per unit in France,$600\mathrm{.}00,,32\mathrm{.}000,,19,200],[$Unit volume,$40,000,,,,],[$Decrease in unit volume from price increase,$-20\mathrm{.}0\%,,,,],[$New lower unit volume,$32,000,,,,]]$