Question

Assuming that efficient markets and the law of one price holds at an exchange rate of $1.43/£. If a Honda Accord costs $18,365 in the U.S., the Honda Accord should cost ________ in Great Britain. [Hint: Pay attention to the units of the exchange rate when applying and calculating P$×S=PE, where S is in units of British pound per U.S. dollar]

a)£26,262
b)£18.365
c)£12,843
d)£9,183

Answer 1

The price of a Honda Accord in Great Britain, with the exchange rate of $1.43/£ and the U.S. price being $18,365, should be £12,843.

Step-by-step explanation:

If we are assuming that efficient markets and the law of one price hold at an exchange rate of $1.43/£, and a Honda Accord costs $18,365 in the U.S., we must calculate the equivalent price in Great Britain by dividing the U.S. price by the exchange rate. Using the formula P$ × S = P£, where P$ is the dollar price of the good, S is the exchange rate ($/£), and P£ is the price in British pounds, we can find the price of the Honda Accord in Britain.

By dividing $18,365 by the exchange rate of $1.43/£, you get $18,365 / $1.43/£ = £12,843.

Therefore, the price of the Honda Accord in Great Britain should be £12,843.