Final answer:
Based on the principle of purchasing power parity (PPP), the Mexican peso is undervalued by 14.29% compared to the US dollar.
Step-by-step explanation:
Based on the information provided, we can calculate the implied exchange rate for the Big Mac in Mexico using the purchasing power parity (PPP) theory. The PPP theory states that, in the long run, the exchange rate between two currencies should equalize the prices of a basket of goods, in this case, the Big Mac.
To calculate the implied exchange rate, we can divide the price of a Big Mac in Mexico (MXN 80) by the price of a Big Mac in the US (USD 3.50). MXN 80 / USD 3.50 = MXN 22.86 per USD.
The current exchange rate is 1 USD = MXN, so we need to convert MXN 22.86 to USD. MXN 22.86 / 1 = USD 22.86.
To determine whether the MXN is overvalued or undervalued, we compare the calculated implied exchange rate (USD 22.86) to the current exchange rate (USD 1 = MXN). If the calculated rate is higher, it means the MXN is overvalued. If the calculated rate is lower, it means the MXN is undervalued. In this case, since the calculated rate (USD 22.86) is higher than the current rate (USD 1 = MXN), the MXN is undervalued by 14.29% (Option B).