Given the following Classical-type table showing the fixed money prices of each good in each of the two countries:
$\begin{array} { l c c }
& \underline{\text { Shoes } }&\underline{ \text { Wine} } \\
\text { United States } & \text { \$20/pair } & \text { \$10/bottle } \
\text { Switzerland } & 100 \text { francs/pair } & 40 \text { francs/bottle }
\end{array}$
If the exchange rate is flexible, the upper limit to the price of the dollar (i.e., the number of Swiss francs per dollar above which there is export of both goods by Switzerland) is
A) 5 francs = $1.
B) 4 francs = $1.
C) 0.25 francs = $1.
D) 0.20 francs = $1.

Question

Given the following Classical-type table showing the fixed money prices of each good in each of the two countries:
$\begin{array} { l c c } 
& \underline{\text { Shoes } }&\underline{ \text { Wine} } \\
\text { United States } & \text { \$20/pair } & \text { \$10/bottle } \
\text { Switzerland } & 100 \text { francs/pair } & 40 \text { francs/bottle }
\end{array}$
If the exchange rate is flexible, the upper limit to the price of the dollar (i.e., the number of Swiss francs per dollar above which there is export of both goods by Switzerland) is
A) 5 francs = $1.
B) 4 francs = $1.
C) 0.25 francs = $1.
D) 0.20 francs = $1.

Quizplus · Accepted Answer

The upper limit to the price of the dollar is the point at which the price of both goods is the same in both countries. At this point, there is no incentive for either country to export either good to the other country.In this case, the price of shoes is the same in both countries when the exchange rate is 5 francs = $1. The price of wine is the same in both countries when the exchange rate is 4 francs = $1. Therefore, the upper limit to the price of the dollar is 5 francs = $1.

Given the Following Classical-Type Table Showing the Fixed Money Prices