Answer: (1) 10 euros (2) 15dollars
Explanation:
S= P1 /P2
where:
S= Exchange rate of currency 1 to currency 2
P1 = Cost of good X in currency 1
P2 = Cost of good X in currency 2
(1) s = 1.5, P1 = 15 dollars, P2 = ???
so,
1.5 = 15 / P2
P2 = 15/1.5 = 10 euros
Hence, according to the theory of purchasing power parity,
The price of a haircut that cost 15 dollars in Dallas will be 10 euros in Paris.
(2) S = P1/P2
taking 1 euro to 1.5dollars exchange,
1.5 = P1/P2 but P2 = 10 euros
hence P1 = 1.5 x 10 = 15 dollars.
Hence, according to the theory of purchasing power parity,
A wheel of French cheese that costs 20 euros in Paris should cost 15dollars in Dallas
