Here are the results of Challenge #17. The original problem is stated below, along with the responses...

The problem:

Charles' Zeno-like Beer Run

At one time, the Canadian and US dollars were discounted by 10 cents on each side of the border (i.e., a Canadian dollar was worth 90 US cents in the US, and a US dollar was worth 90 Canadian cents in Canada). Our man Charles, always looking for a logical scheme, walks into a pub on the US side of the border, orders 10 US cents worth of beer, pays with a US dollar and receives a Canadian dollar in change. He then walks across the border to Canada, orders 10 Canadian cents worth of beer, pays with a Canadian dollar and receives a US dollar in change. He continues this throughout the day, and ends up dead drunk with the original dollar in his pocket.

The Following responses explained who paid for the beers!!

Thanks for the submissions!!

Below is the result of your feedback form. It was submitted by Jeff Bourgeois () on Sunday, May 10, 1998 at 21:07:49

username: acadianj@shreve.net

state: LA

city: Bossier City

country: USA

comments: Charles had best have passed-out after his last Molson. Best i figure, he tied one on for FREE, and each pub picked up the tab of their counterpart across the border since each had to replace the kegs - unless the beer is imported from the neighboring country and paid for in local country currency. this should drive economists madder than they already are, eh.

In my mind, i can only trace this back as far as whatever agency sets monetary exchange rate policy. the answer and explanation should give clue on how to play that market.

Actually, i haven't got a clue, so i'll have another cold-beer

which ain't free but IS tasty! Tecate.

Below is the result of your feedback form. It was submitted by Valter Sorana () on Saturday, May 16, 1998 at 04:20:43

username: vsorana@leland.stanford.edu

state: CA

city: Stanford

country: USA

comments: The drinks are paid for by whomever is legally obliged to

convert currencies. If it is a government entity, then "the

taxpayers" are paying for the drinks.

Below is the result of your feedback form. It was submitted by Ricardo () on Monday, May 18, 1998 at 14:41:33

state: Tx

country: USA

comments: The bars he went to end up absorbing the loss.

Below is the result of your feedback form. It was submitted by Mark Young () on Tuesday, May 19, 1998 at 22:32:59

city: Wolfville

country: Canada

comments: Charles paid for the beer with the money he (would have)

earned by bopping back an forth across the border.

Suppose that instead of buying beer each time he went into

the pub, he had merely asked for change. Then his US\$1 bill

would have got him CAN\$1.10, which he could have taken to

the Canadian pub to get US\$1.21. After one more round trip,

he would be holding US\$1.46. Another round trip would earn

him another US\$0.30, giving him US\$1.76. But after three

trips poor Charles was holding only US\$1.00. The remaining

US\$0.76 had been (virtually) spent on beer.

Meanwhile, the US pub had exchanged CAN\$3 (worth US\$2.70 to

them) and US\$0.30 of beer for US\$3 (they're even), and the

Canadian pub had exchanged US\$3 (worth CAN\$2.70 to them) and

CAN\$0.30 of beer for CAN\$3 (also even). In each case the

\$0.30 worth of beer went to Charles, who consumed it.

It's quite clear: Charles paid for the beer with the profits

from his arbitrage.

Below is the result of your feedback form. It was submitted by John Furey () on Wednesday, May 20, 1998 at 10:04:55

username: fureyj@mail.wes.army.mil

state: MS

city: Vicksburg

country: USA

comments: The moneychangers behind the scene. An analogous electrochemical concept is familiar. A battery produces power out of itself, seemingly magically until it goes dead and you have to recharge the unseen chemical reactions.

Below is the result of your feedback form. It was submitted by Jamie Dreier () on Wednesday, May 20, 1998 at 15:06:25

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username: James_Dreier@brown.edu

state: RI

city: Providence

country: USA

comments: Short answer: the pubs are paying for the beer. This is

obvious, since Charles is getting beer, the pubs are getting

nothing in the long run, and nobody else is involved!

Longer answer: supposing (as is realistic) that Canadian

dollars are really worth less on the open currency market,

the Canadian pub is losing money like crazy, because they

keep trading US \$ (worth more) for Canadian \$ (worth less)

and they're giving Charles beer to boot!So after n

iterations, the Canadian pub has traded n US dollars

for n Canadian dollars, so it has less money (and less

beer).

Arbitrage is rarely this much fun!

JD

Below is the result of your feedback form. It was submitted by Melissa Comer () on Saturday, June 6, 1998 at 21:27:44

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username: meliscomer

state: CO

city: Denver

country: USA

comments: The pubs

Below is the result of your feedback form. It was submitted by Steve Maynard () on Friday, June 19, 1998 at 23:47:30

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username: smaynard@thiel.edu

state: PA

city: Erie

url: http:\\www.geocities.com\Athens\Parthenon\6598

country: USA

comments: Well... that Charles is a smart fella. Who pays for the drinks? Well... Charles *paid* for them, but that isn't really important. What IS important is that currency only has value because people say that it does... and even though Charles acted as a "free rider", taking advantage of the system, no one was really exploited by it, since both owners of the pubs were perfectly content to take Charles' money and give him change in foreign currency equal to the original amount on the other side of the border. No one pays in the sense that someone suffers a loss, it is just that value is ascribed differently by two groups, and Charles is just giving them what they want and taking from them what they don't want. And he gets what he wants in return. *grin* That's how the economy works!

Below is the result of your feedback form. It was submitted by R.C. O'Finn () on Sunday, July 12, 1998 at 23:26:02

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username: owfamily@mail.idt.net

state: MA

city: Boston

country: USA

comments: No one. Neither money has any real value, but rather a perceived value. At least, this is the case directly, but clearly the beer is coming from somewhere, and indirect sources (investors and others who deal regularly with both economic systems) probably don't fare well in this economy.

Below is the result of your feedback form. It was submitted by Shack Toms () on Sunday, July 12, 1998 at 11:40:30

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username: shack@esinet.net

state: VA

city: Charlottesville

country: USA

comments: If the situation had been stable for some time, then it is likely that the people who paid for Charles's drinks were the people who bought beer with foreign money.

Since the situation is symmetrical with respect to the two nations, it is clear that the money is of equal intrinsic value. However in either nation, the local money is more valuable, presumably because it can be put to greater use. To use the foreign money equally effectively requires a trip across the border. So it isn't quite as convenient and therefore is not as useful.

So the local establishments will then charge a premium to those who pay in foreign money and will offer a premium to those who will accept change in the foreign money.

Charles, the beer-drinking arbitrageur, performs the valuable service of transporting the money to where it is most valued, his payment for this service is a 10% fee per dollar, which in those times was sufficient to buy beer.

In the usual situation, a thirsty foreigner comes into a local bar with only foreign money. If it were not for the possibility of returning the money to the foreign nation, these people would not be able to buy beer at all. Instead, the tavern owner charges the 10% premium in order to pay his arbitrageur who will return the money to where it is most valued.

The amount of the premium will rise or fall until the foreign dollars flowing into the till (from thirsty foreigners) equals the foreign dollars flowing out of the till (via arbitrageurs, who don't necessarily take their fees in beer, but this is the way it is done the case of Charles).

So everyone is getting what he pays for. Charles is essentially being paid by the foreign travelers to change their money for them. The beer he drinks is the fee he is paid for the service he provides. The gross fee is, of course, to be weighed against the costs Charles incurs traversing the border.

If it were not for the arbitrageurs, the foreign money would be worth much less, so the thirsty foreigners are happy enough to pay Charles one beer for every ten they purchase with the money they have.

Below is the result of your feedback form. It was submitted by James Holohan () on Friday, July 24, 1998 at 10:48:09

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username: j.p.holohan@uclan.ac.uk

city: preston

country: UK

comments: One or both of the countries loses out. I don't know how much a US or Canadian dollar is actually worth next to each other but whoever badly valued will lose out. in this example the barmen will as well.

Below is the result of your feedback form. It was submitted by Mike Britton () on Thursday, July 30, 1998 at 16:44:52

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username: paradox@engsoc.carleton.ca

state: ON

city: Ottawa

country: Canada

comments: The bars are paying for the beer.

More precisely, the bars are paying a premium for

exchanging foreign currency for domestic. Charles is

simply taking his premium in beer instead of money.

Were he to take money instead, he could do pretty well

the same thing, collecting Canadian and US dimes as he

goes back and forth.

Below is the result of your feedback form. It was submitted by Sean Cearley () on Thursday, August 13, 1998 at 17:12:11

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username: cearley@telisphere.com

state: WA

city: Federal Way

url: http://www.rpi.edu/~cearls/phil.html

country: USA

comments: The bars on both sides are paying for the drinks.

The discount is 10%, assuming that the dollars have the same value,

and assuming that 10 cents gets you the same amount of beer on

each side of the border.

So when the American bar gives out a Canadian dollar that *they* discount at 10%,

that means that the Cdollar is worth only 90c to *them*, but 100c on the other side.

So the 10c that they would normally fleece from the wandering Canuck is being given right back

to the person who drives it over the border.