Corey, a young entrepreneur, notices that cigarette lighters sell for only $0.50 each in Utah but they sell for $1.00 each in Nevada.
a. If Corey wants to make money by buying and selling lighters, where should he buy the lighters and where should he sell them?
b. If many other people imitate Corey’s behavior, what will happen to the supply of lighters in Utah (rise, fall, unchanged)? What will happen to the supply of lighters in Nevada (rise, fall, unchanged)?
c. What will the behavior in part b do to the price of lighters in Utah? In Nevada?
d. According to the law of one price, what can we say about the price of cigarette lighters in Nevada after all of this arbitrage? More than one of the following may be true:
Less than $1.00 each
More than $1.00 each
The same as the Utah price