Question

According to the law of one price, if the exchange rate between the Euro and the US dollar is €1 = US$ 1.20, a costume that retails for €250 in Paris should sell for _____ in Chicago.

Answer 1

According to the law of one price in the competitive market and with the free transportation cost and without any barriers to trade, when homogenous goods are sold in different countries, then these goods must sold for same price when their price are changed in the terms of same currency.

if the exchange rate between the Euro and the US dollar is €1 = US$ 1.20,

€250=US$ 1.20*250

=$300

Hence it can be said that a costume that retails for €250 in Paris should sell for $300 in Chicago.