Please read through. It\'s easy to follow. I spell out a function and give and e

Question

Please read through. It's easy to follow. I spell out a function and give and example and then follow with a question on how to tweak it.

A firm's profit function in a domestic market is:

(q) = p q C(q)

When output is sold into a foreign market, if the output price p is denominated in the foreign currency and the exchange rate of foreign currency for the firm’sdomestic currency is r, then the firm’s profit function is

(q) = r p q C(q).

Suppose also that the firm has the cost function

For example:

Onto the question: How would we introduce arbitrage?

Explanation / Answer

Well first I would find out what % of 50 is 40, which 40 is 80% of 50. Since $2 is 50 in baht one dollar would equal 25 baht. When the baht deprciates to $40 they lose $5 for every dollar. Since now one dollar would equal only 20 baht. For everything they export they lose 5 dollars so for the number of dollars lost I would set it up as 5x=P. So then x would equal how much money you lost for every p ammount of dollars. So then throw a number into that and use that to make a function like f(x)=x-(x/5). Just to find out there profit/loss and see how long it is sustaniable. Eventually losses will force them to drive up prices, leaving room for a competitior to come in with lower prices at a steadier rate. Cutting the Thai arbitrage out leaving room for a new one. Then the company in Thai could (a) production in more profitable areas (b) produces more/sell more at a cheeper rate which would not work very long or (c) cut back or fail. Two countries prices will never be the same because the individuals in both would differ in many things they would value. I improvised on the math so it may not be right or complete I was just answering it because it said fun brain exercise.

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