While shopping in the Mexican market, you find that limes cost 11 pesos each. You remember that back in the U.S., they cost 80 cents each. If the purchasing power parity theory holds, the rate of exchange is

Question

Quizplus · Accepted Answer

According to the purchasing power parity (PPP) theory, the exchange rate should reflect the relative cost of living in each country. In this case, the cost of a lime in Mexico is 11 pesos, which is equivalent to $0.80/11 = $0.073 per peso. Therefore, the exchange rate should be 1/$0.073 = 13.75 pesos/dollar, or $1/13.75 pesos. Choice A is the closest option to this exchange rate.

While Shopping in the Mexican Market, You Find That Limes