A newly released tennis racket sells for $230 in the United States. Assume purch

Question

A newly released tennis racket sells for $230 in the United States. Assume purchasing power parity (PPP) holds. If the exchange rate between the U.S. dollar and the Swiss franc is $0.8053/SwF, how much should the same tennis racket cost in Switzerland? SwF185.22 SwF212.34 SwF230.00 SwF251.76 SwF285.61 Suppose the price of the racket in Switzerland were actually SwF280. Assuming no transaction costs, transportation costs, or import restrictions, what would PPP predict would happen to the demand for the racket in Switzerland? Demand for the tennis racket would increase in Switzerland. Demand for the tennis racket would decrease in Switzerland.

Explanation / Answer

PPP holds.

Tennis racket solds at $230 in US and exchange rate is 0.8053/SWF

then in switerland racket will be sold at 230/0.8053= 285.61SWF

Q.2

Demand for tennis racket would increase in switerland as they are selling for SWF280 which is less than their intrinsic value of $285.61SWF

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