This is a simple purchasing game. You work for a large food processing company and your goal is to purchase as much wheat as possible either on the domestic market or on the international market. In order to make the experiment run smoothly, I have made some changes to the way markets really work. I will subsequently relax some of these assumptions (so expect a few changes later in the experiment). I will divide you into two countries: Bluelandia and Redistan. The currencies for these countries are cards: blue for Bluelandia and red for Redistan. You will begin with 40 cards from the country in which you reside. I will divide you into a total of 7 groups per country, with each group representing one citizen in either country. Wheat is available for sale in each country. Wheat is exactly the same in both countries. It can be purchased for two red cards in Redistan or for one blue card in Bluelandia. Wheat is available in unlimited supply at these prices. Your objective is to purchase as much wheat as possible, no matter where it comes from. You do not care how much wheat other people buy. It is impossible in this experiment to corner the market or to run the other students out of business. If you only want to purchase wheat in your home country, you do not need to participate in the currency market. You may simply purchase wheat using your home currency. However, if you want to purchase wheat in the other country, you first need to buy foreign currency. Wheat sellers in Redistan accept only red rubles, and sellers in Bluelandia accept only blue bucks. I (the instructor) am an international bank and will sell both currencies in the following manner. Foreign Currency Market In order to facilitate this experiment, I will be the broker that offers currency for sale. . . You may only purchase currency from me. You may purchase either country's currency as long as you have some of the other currency. That is, you need Redistan rubles to purchase Bluelandia bucks, and vice versa. I will sell currency in blocks of four, i.e. four rubles or four bucks, Red currency will be offered for sale only in odd numbered sessions (which includes the first session), and blue currency will be offered for sale only in even numbered sessions. You may only buy one block of currency each round (or 4 Bluelandia bucks or 4 Redistan rubles). Name(s): W . If you want to bid for a block of currency, first decide how much you want to bid. Then, each citizen places the number of cards bid into his or her hand, and holds this or her covered hand against their chest. If working as a group, quietly discuss your bid. But only one person per group should be selected to hold the bid. Be careful not to reveal your bid to other citizens! (The goal is to have everyone select their bids before revealing them to other citizens). You must bid in whole numbers. (Do not tear up cards to bid in fractions). When everyone is ready, I will ask each citizen to reveal his or her bid. The three highest bids each win one block of currency, at the exchange rate of the lowest bid among the three. Recall that a block of currency is four cards. Ties will be broken by a random process: All traders with ties will roll two dice, and the highest roll will win the tie (in the event of receiving the same roll, all traders with ties will roll again). The bidding process is very important. Make sure that you fully understand it before we begin. After each round, please record how much of each type of currency you have a id how much wheat you can purchase; this will help you keep track of how you are doing. There will be several rounds for each treatment, and several treatments (2 more, for a total of 3 treatments). After the final round of each treatment, you should net out your currency for wheat at the relevant price in each country. Are there any questions? Name(s): Lab Report 1. Plot the value of the red currency in each round in terms of the blue currency. Plot the value of the blue currency (in terms of the red currency). What is the relationship between the values of the blue and red currencies? Did the exchange rate converge to the value predicted by PPP? 2. What happened to the blue/red exchange rate when Bluelandia experienced an increase in its price level from one to four? What is the theoretical relationship between prices and exchange rates? 3. What is the law of one price? What would absolute PPP predict for the equilibrium exchange rate in each part of the experiment? 4. What kinds of things might we expect to happen if the exchange rate between two countries is fixed at a level that is inconsistent with PPP (for example, if one blue card - one red card in the benchmark treatment)?