If a Bottle of Fine French Wine Costs US$250 in the U.S

question 39

Multiple Choice

If a bottle of fine French wine costs US$250 in the U.S., 2500 rand in South Africa, there are no transaction costs, and the exchange rate is 5 rand/US$, then

• A)there is an arbitrage opportunity by buying the wine in the U.S., and selling it in South Africa and the price in South Africa will drop.
• B)there is an arbitrage opportunity by buying the wine in South Africa., and selling it in the U.S. and the price in the U.S. will drop.
• C)here is an arbitrage opportunity by buying the wine in South Africa., and selling it in the U.S. and the price in the U.S. will rise.
• D)there is no arbitrage opportunity.

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Definitions:

Transfer Price

The price at which goods, services, or intellectual properties are traded between divisions within the same company.

Lemonade Stand

A small, temporary business venture, often run by children, that sells lemonade.

Intermediate Good

Goods that are used in the production process to produce final goods or services.

Average Costs

The total costs divided by the quantity produced or consumed, indicating the cost per unit.