This topic contains a solution. Click here to go to the answer
« previous next »

Author Question: Define the price elasticity of demand and show how it is calculated. What will be an ideal ... (Read 46 times)

saliriagwu

  • Hero Member
  • *****
  • Posts: 537
on: Jun 29, 2018
Define the price elasticity of demand and show how it is calculated.
 
  What will be an ideal response?

Question 2

The Big Mac Theory of Exchange Rates tests the accuracy of 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 Switzerland, the average price of a Big Mac at that time was 6.50 Swiss francs. If the exchange rate between the dollar and the Swiss franc was 0.93 Swiss francs per dollar, explain how it would be profitable to buy Big Macs in the United States instead of in Switzerland.


Related Topics

Need homework help now?

Ask unlimited questions for free

Ask a Question
Marked as best answer by a Subject Expert

chloejackso

  • Sr. Member
  • ****
  • Posts: 316
Reply #1 on: Jun 29, 2018
Answer to Question 1

The price elasticity of demand is units-free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buying plans remain the same. It equals the absolute value (or magnitude) of the ratio of the percentage change in the quantity demanded to the percentage change in the price. The percentage change in quantity (price) is measured as the change in quantity (price) divided by the average quantity (price).

Answer to Question 2

If a Big Mac costs 6.50 Swiss francs in Switzerland, a person in Switzerland could trade in that 6.50 Swiss francs for 6.99 (6.50 Swiss francs / 0.93 Swiss francs per dollar) and buy 6.99 / 4.79 = 1.46 Big Macs in the United States. Those 1.46 Big Macs could then be sold in Switzerland for 6.50 Swiss francs each, generating 1.46 Big Macs  6.50 Swiss francs per Big Mac = 9.49 Swiss francs. This implies that a person in Switzerland could profit by trading in Swiss francs for dollars, buying Big Macs in the United States, and reselling those Big Macs in Switzerland.


saliriagwu

  • Member
  • Posts: 537
Reply 2 on: Jun 29, 2018
Great answer, keep it coming :)

Animal_Goddess

  • Member
  • Posts: 339
Reply 3 on: Yesterday
Wow, this really help

« previous next »
 

Did you know?

Nearly all drugs pass into human breast milk. How often a drug is taken influences the amount of drug that will pass into the milk. Medications taken 30 to 60 minutes before breastfeeding are likely to be at peak blood levels when the baby is nursing.

Did you know?

In most climates, 8 to 10 glasses of water per day is recommended for adults. The best indicator for adequate fluid intake is frequent, clear urination.

Did you know?

Human kidneys will clean about 1 million gallons of blood in an average lifetime.

Did you know?

Patients who have been on total parenteral nutrition for more than a few days may need to have foods gradually reintroduced to give the digestive tract time to start working again.

Did you know?

The average office desk has 400 times more bacteria on it than a toilet.

A microsatellite locus can show linkage to a disease gene A microsatellite locus can show linkage to a disease gene
If you want to show differences between items at the same time, a bar graph is more effective than a If you want to show differences between items at the same time, a bar graph is more effective than a
Monozygotic twins’ scores for five personality factors show higher correlations than scores for ... Monozygotic twins’ scores for five personality factors show higher correlations than scores for ...
The growing demand for electrical power, carbon sequestration and storage must be a priority The growing demand for electrical power, carbon sequestration and storage must be a priority
The demand for cheap coal to generate electrical power is rising The demand for cheap coal to generate electrical power is rising
Food Labels Now Show Trans Fats Food Labels Now Show Trans Fats
Video: Morphology of a tomato plant

For a complete list of videos, visit our video library