Use the table for the question(s)below.
Consider the following prices from a McDonald's Restaurant:

-A McDonald's Big Mac value meal consists of a Big Mac sandwich,large Coke,and a large fry.Assuming that there is a competitive market for McDonald's food items,at what price must a Big Mac value meal sell to ensure the absence of an arbitrage opportunity and uphold the Law of One Price?
A)$4.08
B)$4.38
C)$5.47
D)$5.77
E)$5.00

Question

Use the table for the question(s)below.
Consider the following prices from a McDonald's Restaurant:
 
-A McDonald's Big Mac value meal consists of a Big Mac sandwich,large Coke,and a large fry.Assuming that there is a competitive market for McDonald's food items,at what price must a Big Mac value meal sell to ensure the absence of an arbitrage opportunity and uphold the Law of One Price?
A)$4.08 
B)$4.38 
C)$5.47 
D)$5.77 
E)$5.00

Quizplus · Accepted Answer

To uphold the Law of One Price, the Big Mac value meal should cost the same regardless of whether it is purchased separately or as a meal. Therefore, we need to find the cost of purchasing a Big Mac sandwich, a large Coke, and a large fry separately and add them up.

Big Mac Sandwich: $2.49 
Large Coke: $1.69 
Large Fry: $1.79

Total cost of purchasing separately: $6.97

Therefore, the price of the Big Mac value meal should be $6.97 to prevent an arbitrage opportunity. However, since McDonald's offers a discount for purchasing the meal as a whole, the actual price of the Big Mac value meal is lower:

Actual price of Big Mac value meal: $5.47

Therefore, the answer is C.

Use the Table for the Question(s)below