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Exchange rate in purchasing power parity

Question:

In June 2005, a Big Mac sold for 6,000 pesos in Colombia and $3.00 in the United States.  The exchange rate in June 2005 was 2,300 pesos per US Dollar.  So, on Big Mac purchasing power parity grounds the Colombian peso was i. ___________________________.
ii. Briefly Explain?

Answer:

At the going exchange rate, the price in Columbia is 6,000 pesos while that in US is 6,900 pesos equivalent. Therefore, Colombian peso was undervalued and it should had been 2,000 peso per US dollar.

 

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