What determines how much a foreign producer allows the dollar price of a product sold in the United States to be affected by a change in the real exchange rate?
What will be an ideal response?
Answer: Pricing-to-market interacts with changes in the real exchange rate to prevent the full pass-through of the change in the exchange rate to the change in the price of the good. If the real exchange rate moves in a favorable direction for the monopolist, the foreign price of the good could be allowed to fall one-for-one with the appreciation of the foreign currency. But, while the monopolist will allow the price to fall to allow the sale of more goods, the monopolist will not let the price fall one-for-one with the exchange rate because the monopolist has the opportunity to take enhanced profitability on all sales. Conversely, if the real exchange rate moves in an unfavorable direction for the monopolist, the foreign price of the good will be allowed to rise to decrease the amount sold, but the monopolist will also accept some reduced profitability on all sales.
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