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Chapter 15: Problem 4

Steve, an American in London, wants to buy a British-made sweater. The current price of the sweater is \(£ 40 .\) Would Steve be better off if the exchange rate is 1 dollar=\(£ 0.87\) or 1 dollar =£ 0.77 ?Explain your answer.

Short Answer

Expert verified
Steve would be better off if the exchange rate is 1 dollar=£ 0.87 because the sweater costs less in US dollars at this rate.

Step by step solution

01

Convert the sweater price using the first exchange rate

Using the exchange rate of 1 dollar=£ 0.87, we divide the price of the sweater in pounds (£40) by the exchange rate (0.87). The formula is \( \frac{40}{0.87} \) which equals approximately $45.98.
02

Convert the sweater price using the second exchange rate

Using the exchange rate of 1 dollar=£ 0.77, we divide the price of the sweater in pounds (£40) by the exchange rate (0.77). The formula is \( \frac{40}{0.77} \) which equals approximately $51.95.
03

Compare the two results

Comparing Step 1 and Step 2, we can see that with an exchange rate of 1 dollar = £0.87, the sweater costs Steve approximately $45.98, while with an exchange rate of 1 dollar = £0.77, the sweater costs him approximately $51.95. Therefore, Steve would be better off with an exchange rate of 1 dollar = £0.87 as the sweater costs less in US dollars at this rate.

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