2000 2010 Average weekly wage $500 $750 CPI 170 220 The following table list the
ID: 1092168 • Letter: 2
Question
2000 2010
Average weekly wage $500 $750
CPI 170 220
The following table list the priced of small market basket purchase in both 2000 and 2010. Assuming that this basket of goods is representative of all goods and services,
(a) Compute the cost of market basket in 2000.
(b) Compute the cost of market basket in 2010
(c) By how much has the average price level risen between 2000 and 2010?
(d) The average household's nominal income increased from $30,000 to $60,000 between 2000 and 2010. What happend to it's real income?
Price (per Unit)
Item Quantity 2000 2010
Coffee 20 pounds $ 4 $ 5
Tuition 1 year 4,ooo 7,000
Pizza 100 pizzas 8 10
DVD rental 90 days 10 5
Gaslone 1,000 gallons 2 3
Explanation / Answer
a. Total cost in 2000 = Price of (Coffee + tuition + pizza + DVD rental + gasoline)
= (80 + 4000 + 800 + 900 + 2000)
= $ 7780
b. a. Total cost in 2010 = Price of (Coffee + tuition + pizza + DVD rental + gasoline)
= (100 + 7000 + 1000 + 450 + 3000)
= $ 11550
c. Net increase in average price level = 1 - Total cost in 2010/Total cost in 2000
= 1 - (11550/7780)
= 1- 1.4846
= 0.4846 or 48.46 %
d.Since the index is 148.46 hence on dividing it with salary ie $ 60000 and multiplying by 100 we ve
real income = $ 40414.93 in 2010..
whereas the real income of household increased by $ 10414.93 which is (34.72%) in period..
Rise is bec nominal wage rise more quickly than price level..
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