The "Big Mac Theory of Exchange Rates" tests the accuracy of the purchasing power parity theory. In July 2015, the Economist reported that the average price of a Big Mac in the United States was $4.79
In Mexico, the average price of a Big Mac at that time was 49 pesos. If the exchange rate between the dollar and the peso was 13.60 pesos per dollar, explain how it would be profitable to buy Big Macs in Mexico instead of in the United States.
If a Big Mac costs $4.79 in the United States, an American could trade in that $4.79 for 65.14 pesos ($4.79 × 13.60 pesos/dollar) and buy 65.14/49 = 1.33 Big Macs in Mexico. Those 1.33 Big Macs could then be sold in the United States for $4.79 each, generating 1.33 Big Macs × $4.79 per Big Mac = $6.37. This implies that an American could profit by trading in dollars for pesos, buying Big Macs in Mexico, and reselling those Big Macs in the United States.
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Refer to the figure above. If the relative price of T were to increase, then the price line would
A) shift out in a parallel fashion. B) shift in a parallel fashion. C) become steeper. D) become flatter.
Refer to the information provided in Figure 2.4 below to answer the question(s) that follow.
Figure 2.4According to Figure 2.4, as the economy moves from Point B to Point D, the opportunity cost of motorcycles, measured in terms of hybrid cars,
A. increases B. remains constant. C. initially increases, then decreases. D. decreases.