Pricing with Exchange Rate Considerations At Madison We continue Example 7.1 but now assume that Madison manufactures its product in the United States and sells it in the United Kingdom (UK). Given the prevailing exchange rate in dollars per pound. Madison wants to determine the price in pounds it should charge in the UK so that its profit in dollars is maximized. The company also wants to see how the optimal price and the optimal profit depend on exchange rate fluctuations. 7.1 Pricing Decisions at Madison The Madison Company manufactures and retails a certain product. The company wants to determine the price that maximizes its profit from this product. The unit cost of producing and marketing the product is \$50. Madison will certainly charge at least \$50 for the product to ensure that it makes some profit. However, there is a very competitive market for this product, so that Madison’s demand falls sharply when it increases its price. How should the company proceed? 2 In the exchange rate model in Example 7.2, suppose the company continues to manufacture its product in the United States, but now it sells its product in the United States, the United Kingdom, and possibly other countries. The company can independently set its price in each country where it sells. For example, the price could be \$150 in the United States and £110 in the United Kingdom. You can assume that the demand function in each country is of the constant elasticity form, each with its own parameters. The question is whether the company can use Solver independently in each country to find the optimal price in this country. (You should be able to answer this question without actually running any Solver model(s), but you might want to experiment, just to verify your reasoning.)

Practical Management Science

6th Edition
WINSTON + 1 other
Publisher: Cengage,
ISBN: 9781337406659

Practical Management Science

6th Edition
WINSTON + 1 other
Publisher: Cengage,
ISBN: 9781337406659

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Chapter 7.3, Problem 6P
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