Spacely Sprockets, Inc, usually pays 1,000 for a million flanges, which it uses as inputs in the manufacture of sprockets. It also spends an average of 20 per million flanges on finding manufacturers and negotiating contracts. Spacely is capable of making its own flanges at a cost of 980 per million. Given these costs,
a. Spacely should continue to contract out for flanges
b. Spacely should start to manufacture its own flanges
c. it's not possible to say what Spacely should do
d. Spacely should stop paying the additional 20 to find and negotiate contracts and just buy the flanges outright for 1,000 per million
e. Spacely should move away from the use of flanges and toward an input that it can produce by itself
Question 2
If the purchasing power parity theory were literally true
a. we should see some nations devaluing their currencies relative to the U.S. dollar while other nations revalue their currencies
b. the price of a traded good should be the same everywhere in the world
c. the price of a Big Mac should be the same everywhere in the world
d. the exchange rate should be the same everywhere in the world
e. prices should tend toward equality with exchange rates
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