A new coat costs 1,670 Russian rubles. How much will the identical coat cost in Euros if absolute purchasing power parity exists and the following exchange rates apply?

Question

Quizplus · Accepted Answer

To find the cost in Euros, we need to divide the cost in rubles by the exchange rate of ruble to Euro. From the exchange rates table, we see that 1 Russian ruble is equal to 0.015 euro. Therefore, 1,670 rubles will be equal to:

1,670 rubles * (0.015 €/rubles) = 25.05 euros

However, we need to choose the option that satisfies absolute purchasing power parity. According to this theory, the price of identical goods in different countries should be equal after accounting for the exchange rate. In other words, the cost of the coat in Euros should be equal to what it would cost if the coat were purchased in Europe.

Looking at the answer choices, it is clear that options C, D, and E are much higher than the original cost of the coat in rubles. Option A is lower, but it may not be realistic that the coat would be so cheap in Europe. Option B is a more reasonable choice, as it is close to the original price of the coat in rubles and satisfies the theory of purchasing power parity. Therefore, the best choice is B.

A New Coat Costs 1,670 Russian Rubles