Your business provides CDs for free to customers who pay for the English courses
ID: 2627446 • Letter: Y
Question
Your business provides CDs for free to customers who pay for the English courses that you offer in Mexico. You are considering mass-producing the CDs in the United States so that you can sell (export) them to distributors or to retail stores throughout Mexico. You would price the CDs in dollars when exporting them. The CDs are less effective without the teaching, but still can be useful to individuals who want to learn the basics of the English language. a.If you pursue this idea, explain how the factors that affect international trade flows (identified in Chapter 2) could affect the Mexican demand for your CDs. Which of these factors would likely have the largest impact on the Mexican demand for your CDs? What other factors would affect the Mexican demand for the CDs?
Explanation / Answer
The value of the Mexican peso may influence the demand for CDs. If the peso strengthens against the dollar, it would likely result in a higher demand for your CDs, since the CDs are priced in dollars. If the peso weakens against the dollar, it would likely result in a lower demand for your CDs.
The exchange rate movements would likely have the largest effect. However, a large change in any of the other factors could also have a large impact. While exchange rates may adjust in a manner to partially offset a large change in the other factors (as will be explained throughout the text), the exchange rate may not immediately adjust to changes in these factors.
Beyond the factors listed in Chapter 2 of the text, another key factor is the general demand by Mexico consumers to learn the basics of the English language. In addition, the degree of competition is important. There are other local firms that have created their own CDs on learning the English language.
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