Use the table for the question(s)below.
Consider the following prices from a McDonald's Restaurant:

-A McDonald's Big Mac value meal consists of a Big Mac, a large Coke and a large fries. Assume that there is a competitive market for McDonald's food items and that McDonald's sells the Big Mac value meal for $4.79. Does an arbitrage opportunity exists and, if so, how would you exploit it and how much would you make on one value meal?
A)No, no arbitrage opportunity exists.
B)Yes, buy a value meal and then sell the Big Mac, Coke and fries to make arbitrage profit of $0.38.
C)Yes, buy a Big Mac, Coke and fries, then sell a value meal to make arbitrage profit of $1.09.
D)Yes, buy a Big Mac, Coke and fries, then sell a value meal to make arbitrage profit of $0.68.

Question

Use the table for the question(s)below.
Consider the following prices from a McDonald's Restaurant:
 
-A McDonald's Big Mac value meal consists of a Big Mac, a large Coke and a large fries. Assume that there is a competitive market for McDonald's food items and that McDonald's sells the Big Mac value meal for $4.79. Does an arbitrage opportunity exists and, if so, how would you exploit it and how much would you make on one value meal?
A)No, no arbitrage opportunity exists. 
B)Yes, buy a value meal and then sell the Big Mac, Coke and fries to make arbitrage profit of $0.38. 
C)Yes, buy a Big Mac, Coke and fries, then sell a value meal to make arbitrage profit of $1.09. 
D)Yes, buy a Big Mac, Coke and fries, then sell a value meal to make arbitrage profit of $0.68.

Quizplus · Accepted Answer

If a competitive market exists, then the individual components of the value meal should add up to the same price as the value meal. By adding up the prices of a Big Mac ($3.99), a large Coke ($1.89) and a large fries ($1.79), the total comes out to be $7.67, which is higher than the price of the value meal. This presents an arbitrage opportunity to buy a value meal for $4.79 and sell the individual components for a total of $5.17, making a profit of $0.38.

Use the Table for the Question(s)below