Understanding Arbitrage

Arbitrage is a simple concept of exploiting price differences in identical items to make risk-free profits. The video uses an example of buying apples in one market for $1 and selling them in another for $1.50, illustrating how arbitrage works. It explains the process of buying and selling to make a profit and discusses the market effects, such as changes in supply and demand, which eventually lead to price equalization, eliminating the opportunity for arbitrage.

What is the primary goal of arbitrage?

• To make risk-free profit

• To stabilize prices

• To decrease supply

• To increase market demand

In the hypothetical scenario, what is the price of apples in the cheaper market?

• $2.00 per apple

• $1.50 per apple

• $1.00 per apple

• $0.50 per apple

What is the price of apples in the more expensive market in the given scenario?

• $1.50 per apple

• $2.00 per apple

• $1.00 per apple

• $0.50 per apple

How much profit is made by selling 10 apples in the more expensive market?

• $3

• $4

• $5

• $6

What is the initial cost of buying 10 apples in the cheaper market?

• $10

• $20

• $5

• $15

What happens to the supply in the cheaper market due to continuous arbitrage?

• Supply fluctuates

• Supply increases

• Supply decreases

• Supply remains constant

What effect does increased demand have on the more expensive market?

• Price fluctuates

• Price decreases

• Price remains constant

• Price increases

What is the eventual outcome of continuous arbitrage on market prices?

• Prices diverge

• Prices remain unchanged

• Prices stabilize

• Prices fluctuate

What is a potential limitation of arbitrage opportunities?

• They are unaffected by supply and demand

• They always result in loss

• They are limited by market adjustments

• They are infinite

What is the effect of arbitrage on the price discrepancy between two markets?

• It widens the gap

• It narrows the gap

• It causes fluctuations

• It has no effect