Suppose the same automobile is produced by a multinational firm in the US and Europe. The price of the car is $12,500 in the US or €25,000 in Europe,and there are no transport costs or tariffs. Then according to the law of one price,the value of the dollar in terms of the euro should be
A) ½
B) 1
C) 2
D) 2.5
E) 4

Question

Quizplus · Accepted Answer

The law of one price states that in the absence of transport costs and tariffs, identical goods should have the same price when expressed in the same currency. To find the value of the dollar in terms of the euro, divide the price in Europe (€25,000) by the price in the US ($12,500), which equals 2 (€25,000 / $12,500 = 2). This means 1 dollar is worth 2 euros.

Suppose the Same Automobile Is Produced by a Multinational Firm