The following two graphs depict the equilibrium price of a pound of flax seed in Kentucky and West Virginia, respectively. Assume the type and quality of the flax seed being sold in the two states are identical. Further, assume flax seed sellers incur zero costs to transport flax seed between the two states and that there are no other barriers to trade. Use these graphs to answer the next questions.

-Suppose the price of a pound of flax seed in West Virginia is currently $1.00. The law of one price suggests that because the price of a pound of flax seed is $1.20 in Kentucky, the price of a pound of flax seed will be ________ in West Virginia after sellers adjust their supplies in both markets.

Question

The following two graphs depict the equilibrium price of a pound of flax seed in Kentucky and West Virginia, respectively. Assume the type and quality of the flax seed being sold in the two states are identical. Further, assume flax seed sellers incur zero costs to transport flax seed between the two states and that there are no other barriers to trade. Use these graphs to answer the next questions.

-Suppose the price of a pound of flax seed in West Virginia is currently $1.00. The law of one price suggests that because the price of a pound of flax seed is $1.20 in Kentucky, the price of a pound of flax seed will be ________ in West Virginia after sellers adjust their supplies in both markets.

Quizplus · Accepted Answer

The law of one price suggests that prices will equalize across markets due to arbitrage. Sellers will move flax seed from West Virginia to Kentucky to take advantage of the higher price, increasing supply in Kentucky and decreasing it in West Virginia, leading to a price adjustment between $1.00 and $1.20.

The Following Two Graphs Depict the Equilibrium Price of a Pound