Base Year (2006) 2013 Product Quantity Price Price Cokes 100 $0.50 $0.75 Hamburg
ID: 1201305 • Letter: B
Question
Base Year (2006) 2013
Product
Quantity
Price
Price
Cokes
100
$0.50
$0.75
Hamburgers
200
2.00
2.50
CDs
10
20.00
21.00
1) Refer to table above. Assume the market basket for the consumer price index has three products: Cokes, hamburgers, and CDs.
The Consumer Price Index for 2013 equals ______.
Product
Quantity
Base Year Price (2001)
Price (2012)
Price (2013)
Burritos
10
$1.00
$1.50
$1.75
Flashlights
15
5.00
7.00
6.75
Golf balls
8
2.00
3.00
3.50
2) Refer to table above. Consider a simple economy that produces only three products: burritos, flashlights, and golf balls. Use the information in the table to calculate the inflation rate for 2013 (vs. 2012), as measured by the consumer price index.
Year
Nominal Average
Hourly Earnings
CPI
2011
$10
100
2012
10
105
2013
12
110
3) Refer to table above. Real average hourly earnings were equal to ________ in 2012.
4) Looking at the table above, real average hourly earnings between 2012 and 2013 changed by ______%.
5) Matt's real wage in 2014 is $26.80. If the price level is 104, what is Matt's nominal wage?
Base Year (2006) 2013
Product
Quantity
Price
Price
Cokes
100
$0.50
$0.75
Hamburgers
200
2.00
2.50
CDs
10
20.00
21.00
Explanation / Answer
1. CPI = Cost of market baskets at current prices/cost of market basket at base year prices*100.
Cost of market basket at current prices = Price*quantity (of coke, hamburgers and CD's)
= 100*0.75 + 200*2.50 + 10*21
= 75 + 500 + 210
= $785.
Cost of market basket at base year price = Price*quantity
= 100*0.50 + 200*2 + 10*20
= 50 + 400 + 200
= $650.
CPI = 785/650*100
CPI = 120.76
2. For computing inflation, we first need to compute the CPI of both the years, 2012 and 2013.
CPI for 2012 = Cost of market baskets at current prices/cost of market basket at base year prices*100.
Cost of market baskets at current prices = 10*1.5 + 15*7 + 8*3.
Cost of market baskets at current prices = 15 + 105 + 24 = 144.
Cost of market baskets at base prices = 10*1+ 15*5 + 8*2 = 101.
CPI for 2012 = 144/101*100 = 142.57
Similarly, CPI for 2013 = Cost of market baskets at current prices/base year prices*100
Cost of market baskets at current prices = 10*1.75 + 15*6.75 + 8*3.50 = 17.5 + 101.25+28 = 146.75
Base year prices we alredy have = 101
CPI for 2013 = 146.75/101*100 = 145.29
Inflation = (Final CPI-initial CPI)/initial CPI*100
INflation = 145.29 - 142.57/142.57*100
Inflation = 1.90%
3. Realwage = nominal wage/CPI*100
R.W = 10/105*100 = 9.52
4. Real wage in 2013 = 12/110*100
R.W = 10.90
Change = (R.W in 2013 - R.W in 2012)/R.W in 2012*100.
Change = (10.90 - 9.52)/9.52*100
Change = 14.495%
5. Real wage = nominal wage/price
Plugging in all the values, we get,
26.80*104 = nominal wage = $$2787.20
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