Suppose that you have one domestic production facility that supplies both the domestic and foreign markets. Assume that the demand for your product in the domestic market is Q $=2,000-3$P and in the foreign market, demand is given by Q$*=2,000-2$P$*.$ Assume that your domestic marginal cost of production is $600.$ If the initial real exchange rate is $1,$ what are your optimal prices and quantities sold in the two markets? By how much will you change the relative prices of your product if the foreign currency appreciates in real terms by $10\%?$ What will you do to production?

How would you respond if the marginal cost of production were increasing? Why?