To answer this question, the price elasticity of demand must be known for the Porsche Carrera. If the car is relatively inelastic, the company can count on high exchange rate pass-through. Meaning, that the Porsche may keep the profit margin by increasing the price of the car as the U.S. dollar weakens in relationship to the Euro. If the car has elastic demand, meaning that price elasticity is less than 1, the car maker will have to reduce margin in order to keep price constant in order to achieve sales. We suspect that Porsche cars are relatively price inelastic because they are a luxury good. Porsche should maintain profit margin.
2. Given the change in exchange rates and the strategy employed by Porsche, would you say that the purchasing power of the U.S. dollar customer has grown stronger or weaker?
Purchasing power of the U.S. dollar as observed from the price of the Porsche Carrera has grown weaker between the months of July and December. This can be observed by looking at the trend in change of the spot exchange rate. (Reference Figure 1 & Figure 2) The spot exchange rate as based on the product price is defined as price in U.S. dollars divided by price in Euros. As the price goes up in U.S. dollars and the price stays constant in Euros, this means that it requires more dollars to buy the same product, or that the dollar has grown weaker.
Figure 1 Spot Exchange Rate based on Price of Porsche Carrera
Figure 2 Percent Change in Spot Exchange Rate
3. In the long run, what do most automobile manufacturers do to avoid these large exchange rate squeezes? Most automobile manufacturers move manufacturing plants to the country they are selling in. Examples of this are Toyota and BMW. This reduces the risk of currency spot exchange rates changing. Labor and other expenses are...