3) [Open economy Macroeconomics - basic concepts]

Explain the following: Molson's Beer is produced in Canada and sold in many countries. In the province of Ontario, a six-pack of Molson's beer sells for $12.95 Canadian. Across the border in Michigan, a six pack of the same beer sells for $6.99 U.S. Suppose that the exchange rate is $0.90 U.S. = $1.00 Canadian.

1.How much would it cost in U.S. currency to buy the beer in Ontario?

2.How much would it cost in Canadian currency to buy the beer in Michigan?

3.Is there an arbitrage opportunity?

4.If there is an arbitrage opportunity, where would you buy and where would you sell? How much profit could you expect on a six-pack?