Mucho Macho is the leading beer in Patagonia, with a 65 percent share of the market. Because of trade barriers, it faces essentially no import competition. Exports account for less than 2 percent of sales. Although some of its raw material is bought overseas, the large majority of the value added is provided by locally supplied goods and services. Over the past five years, Patagonian prices have risen by 300 percent, and U. S. prices have risen by about 10 percent. During this time period, the value of the Patagonian peso has dropped from P 1 = $1.00 to P 1 = $0.50. Required:
a. What has happened to the real value of the peso over the past five years? Has it gone up or down? A little or a lot?
b. What has the high inflation over the past five years likely done to Mucho Macho's peso profits? Has it moved profits up or down? A lot or a little? Explain.