Question

If the price of Yoo-hoo is $2 in New York and $1 in St. Petersburg, Russia (after converting the rubles to dollars), you might expect: Group of answer choices

Answer 1

Answer: A) people to buy Yoo-hoo in St. Petersburg and sell it in New York until the price was the same in each country

Explanation:

As the Yoo-hoo is cheaper in St. Petersberg than in New York, this presents an arbitrage opportunity to buy cheap and sell higher. People will therefore buy from St.Petersberg at the price of $1 and then sell it in New York for $2 thereby making a 100% profit.

Once this happens more and more people will start doing this which would lead to an increase in demand for St. Peterberg Yoo-Hoos. According to the Law of Demand, when demand rises, the price will rise as well so the price in St. Petersberg will keep rising till it gets to the same amount in New York thereby dissuading people from buying to take advantage of the opportunity.