Problem:
Consider a Mexican firm that knits sweaters for sale to a U.S. department store. The firm incurs total costs of 16 pesos/sweater, and sells the sweaters to the department store for $5 per sweater. The exchange rate is 4 pesos/$.
Requirement:
Question 1: What is the firm's markup per sweater as a percentage of revenues?
Question 2: If the peso is devalued 20%, what is the new value of the peso?
Question 3: If the firm keeps dollar prices constant and peso costs constant, what is the markup per sweater as a percentage of revenue after the devaluation?
Question 4: If the firm decides to keep the gross margin per sweater constant (at 20%), would sales expand or decline? Why? What would the new dollar price be after devaluation?
Note: Show supporting computations in good form.