Question6 An Australian company that exports its product to the US market needs to make a decision on the price of its product in the US. Recently, the USD has depreciated and its profit in AUD has been affected. Which of the following statements is TRUE? Select one alternative: If the elasticity of US demand to price is extremely low, the firm can consider increasing the price of its product to increase profit in AUD. If there is a substantial scale of economy in production, the firm should increase the price of its product since it will increase the margin of the product. The firm can maintain its margin in AUD and market share in the US by not changing its price. The firm should not consider setting up a production plant in the US, since it would certainly increase its exposure to the USD. ResetMaximum marks: 2 Flag question undefined

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BlackTom AI · Accepted Answer

First, let's restate the scenario and the options in focus, so every choice can be weighed on its own merits.
- Situation: An Australian firm exports to the US. The USD has depreciated, reducing profit in AUD terms. We must pick which statement is TRUE about pricing strategy.
- Options:
  1) If the elasticity of US demand to price is extremely low, the firm can consider increasing the price of its product to increase profit in AUD.
  2) If there is a substantial scale of economy in production, the firm should increase the price of its product since it will increase the margin of the product.
  3) The firm can maintain its margin in AUD and market share in the US by not changing its price.
  4) The firm should not consider setting up a production plant in the US, since it would certainly increase its exposure to the USD.

Option 1 analysis: With very inelastic (low elasticity) US demand, quantity demanded is not very sensitive to price changes. If price is increased, total revenue in USD can rise or stay similar, and when converted to AUD, the profit in AUD may rise because the drop in quantity is small. This aligns with basic price-elasticity reasoning: for inelastic demand, price increases tend to raise revenue (and potentially profit) in the same currency, which, when converted, can improve AUD profit. This makes the statement plausible and potentially true.

Option 2 analysis: While economies of scale can reduce unit costs, simply raising price to improve margin ignores demand response. If the price rise pushes quantity down, total profit may fall, even with lower costs. The claim that price should automatically rise just because of scale economies ignores elasticity and competitive response, making this option dubious as a universally true rule.

Option 3 analysis: Not changing the price to keep both AUD margin and US market share assumes that the exchange rate movement will not erode AUD margins or that volume offsets any margin change. In reality, a depreciation of the USD against AUD that reduces AUD profit means that keeping the same price in USD (thus leaving AUD margin unchanged) would still translate into lower AUD profit unless currency hedges or price adjustments are made. Therefore, this statement is generally false as a blanket rule.

Option 4 analysis: Recommending against setting up a US production plant because it would increase USD exposure is overly absolute. Local production can hedge currency risk, reduce shipping costs, or improve service levels, and is not guaranteed to “certainly” increase exposure. This makes the blanket claim improper and false as a universal rule.

Putting the pieces together, Option 1 is the only choice that aligns with sound international pricing logic under an inelastic US demand scenario and currency considerations, while the other options rely on flawed assumptions or overly broad claims about cost, demand, or currency strategy.

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