Question

Steven purchases art in France from a "starving artist sale" because he thinks people in America would pay much more for it than the French prices he's seen. In fact, he's right, and he's able to resell the art for a much higher price in the USA, making a tidy profit.

Steven is engaging in _____________ and his actions will tend to make the price of such art ________ in France.

A) insider trading; fall

B) insider trading; rise

C) arbitrage; fall

D) arbitrage; rise

Answer 1

D) arbitrage, rise

​​​​​​Simultaneous buying and selling of commodities across different markets to take advantage of the price difference of the same commodity is called arbitrage.

Here, Steven buys art from where it is cheaper (France) and sells it in the market where the art is expensive (U.S) and gaining from the price difference. So, Steven is engaging in arbitrage.

Now, this will lead to a rise in price of art in French market. Because of Steven's actions, French will know that their art will sell for a higher price in U.S and they will increase the price of art in the French market.