1. 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 - 3P, and in the foreign market, demand is given by Q* = 2,000 - 2P*. 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?

2. How would you respond in Problem 1 if the marginal cost of production were increasing? Why?

3. Suppose you are a monopolist who faces a domestic demand curve given by Q = 1,000 - 2P. Your domestic cost of production involves domestic costs per unit of 300 and a foreign cost per unit produced of 150. If the real exchange rate is 1.1, what would be the price you would charge and the quantity you would sell? How do these variables change when the real exchange rate increases by 10%?

4. Use a program like Crystal Ball to generate Monte Carlo simulations of the profits of Safe Air and Metallwerke under various contracting clauses.

5. In 2008, Endo Pharmaceuticals, a U.S. firm, signed a 5-year contracted with Novartis, a Swiss firm, to obtain the exclusive U.S. marketing rights for Voltaren Gel, an anti-inflammatory useful in treating osteoarthritis. Search the Internet for information about the contract. Who bore the real exchange risk?