According to a New York Times article, shoppers from New York City have played a game of retail arbitrage by shopping at malls in Northern New Jersey, a state where there is no tax on clothing and shoes.
Even after accounting for transactions costs, shoppers could still save money on their clothing and footwear purchases.
Source: Ken Belson and Nate Schweber, Sales Tax Cut in City May Dim Allure of Stores Across Hudson, New York Times, January 18, 2007.
Is the term arbitrage correctly used here?
A) Yes, arbitrage applies even if no resale takes place; in this case the profits are pocketed by the customers themselves.
B) No, arbitrage does not apply to markets that are not in the same geographic area.
C) No, arbitrage means buying at a low price and reselling at a higher price but no resale takes place here.
D) Yes, because shoppers were able to purchase items at lower prices even after deducting their transactions costs.
Question 2
Refer to Figure 12-8. Suppose the market price is 120. Which of the following is true?
A) The firm earns a profit equal to the area A. B) The firm suffers a loss equal to the area A.
C) The firm earns a profit equal to the area A + B. D) The firm will break even.
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