CountryA CountryB Food Total Food Total Quantity Prices 15 20 Prices in Country
ID: 2335072 • Letter: C
Question
CountryA CountryB Food Total Food Total Quantity Prices 15 20 Prices in Country A Prices in Country B A$ per B$ Exchange Rate 1. Assuming the law of one price holds, find the exchange rate between the two countries in terms of currency of Country A (AS) per currency in Country B (BS) 2. Use the exchange rate from the previous question to compute income/expenditure per person in AS for both countries According to this measure, what is the ratio of country A's income/expenditure per person relative to that of country B's 3. Use the prices in country A to evaluate the cost of each country's basket. According to this measure, what is the ratio of country A's income/expenditure per person relative to that of country B's 4. Use the prices in country B to evaluate the cost of each country's basket. According to this measure, what is the ratio of country A's income/expenditure per person relative to that of country B'sExplanation / Answer
1. Determine the per unit cost
Country A = $3/15 units = $0.20 per unit
Country B = $1/20 units = $0.05 per unit
Exchange rate in terms of currency of Country A per currency in Country B = Country B per unit rate / Country A per unit rate
= $0.20/$0.05
=$4
which means $1 currency of Country B is equal to $4 currency of Country A
2. Determination of Income/Expenditure per person in terms of currency A in both the countries
Country A
Income/Expenditure per person = Per unit cost as determined under 1 above (assuming 15 units are ordered by 15 persons)
=$0.20
Country B
Income/Expenditure per person = Per unit cost determined under 1 above X Exchange rate as arrived in 1 (assuming 20 units are ordered by 20 persons)
=$0.05*$4 =$0.20
Ratio between country A and country B = $0.20/$0.20 = 1:1
Scenario 2: If the whole quantity is ordered by one person in both the countries
Income/Expenditure per person in Country A = $3
Income/Expenditure per person in Country B = $1*Exchange Rate = $1*$4 =$4
Hence the ratio will be = $3/$4 = 3:4
3. Price in Country A per unit = $0.20 (refer 1)
Based on above rate, Cost of country A's basket = $0.20*Quantity
=$0.20*15
=$3
Cost of country B's basket if we use price of country A = $0.20*Quantity
=$0.20*20
=$4
Ratio = $3/$4= 3:4
4. Price in Country B per unit = $0.05 (refer 1)
Based on above rate, Cost of country A's basket if we use country B's price= $0.05*Quantity
=$0.05*15
=$0.75
Cost of country B's basket if we use price of country B = $0.05*Quantity
=$0.05*20
=$1
Ratio = $0.75/$1= 3:4