Question: Consider the following scenario. Assume the price of gold in London is selling for $1400...

Question: Consider the following scenario. Assume the price of gold in London is selling for $1400 an ounce while in New York it is fetching a price of $1450 an ounce. What would an economist say about the efficiency of this market? What would an economist predict about what would happen next?

Expert Solution

An efficient market is one in which profit opportunities are eliminated almost instantaneously. In the given scenario, the price of gold in London is selling for $1400 an ounce while in New York it is fetching a price of $1450 an ounce, an economist would argue that this market is currently not efficient. Because the reason is that in this type of market, there are still profit opportunities to be had. An economist would predict that market participants could buy gold in London and sell it in New York until there is no more incentive to do so, i.e. when there are no more profit opportunities.

Rahul Sunny answered 2 years ago

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