15) The base pay for army recruits is $16,000 per year. The army has been recrui

Question

15) The base pay for army recruits is $16,000 per year. The army has been recruiting 100,000 new soldiers each year. But this is found to be inadequate given the need for troops in abroad. The Pentagon decides that the total number of new recruits should be increased to 150,000. If the price elasticity of supply for army recruits is 2, what would have to be the increase in base pay to attract the desired number of recruits?

16) Be prepared to do the following sort of calculation: In 1982 Harvey Homeowner bought a new home for $138,000. In August of 2004 he sold the home for $199,000. If 1982 was the base year for the CPI and if it stood at 189.5 in 2004 when he sold his home, how did Mr. Homeowner make out on his investment?

Explanation / Answer

(15) Price elasticity of demand = Change in quantity / Change in base pay

2 = [(150,000 - 100,000) / 100,000] / [(X - 16,000) / 16,000] [X: Revised base pay]

2 x [(X - 16,000) / 16,000] = 0.50

[(X - 16,000) / 16,000] = 0.25

X - 16,000 = 4,000

X = 20,000

Increase in base pay = $20,000 - $16,000 = $4,000

(16)

Purchase price in 2004 prices = $138,000 x (189.5 / 100) = $261,510

Selling price in 2004 = $199,000

So, Return on investment = [($199,000 / $261,510) - 1] x 100 = - 23.9%

So, he made a loss in real (price-adjusted) terms.

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.