a) Jodie earns $25,000 at the end of year 1, when the CPI was 460. If the CPI at
ID: 1250997 • Letter: A
Question
a) Jodie earns $25,000 at the end of year 1, when the CPI was 460. If the CPI at the end of year 2 is 504, what would Jodie have to earn at the end of year 2 to maintain a constant real wage?b) What would she have to earn in year 2 to obtain a 5% increase in her real wage? What percentage increase in the nominal wage is this?
2) Supply and Demand
a) Describe the difference between quantity supplied and quantity demanded and the difference between change in demand and change in supply.
b) Suppose you have a simple demand and supply diagram in the market for coffee. Discuss how each of the following events will affect the market for coffee:
i. A blight on coffee plans kills off much of the Brazilian crop.
ii. The price of tea declines.
iii. Coffee is shown to cause cancer in laboratory rats.
iv. Coffee prices are expected to rise rapidly in the near future.
Explanation / Answer
1. A) A constant real wage implies that the ratio of wage to price is constant 25000/460 = W/504 W = 25000*(504/460) W = 27,391.30 B) Now, we need a 5% increase in real wage (25000/460)*1.05 = W/504 W = (25000/460)*1.05*504 W = 28,760.86 The old nominal wage was 25,000. The new nominal wage is 28,760.86. So, the percentage change is: %change = (28,760.86-25,000)/25,000 * 100 %change = 15 The nominal wage needs to increase 15% 2. a) Demand and supply are schedules. The demand curve tells you what quantities are demanded at any given price. The supply tells you what quantities producers are willing to supply at any given price. The quantity demanded is one point on the demand curve while the quantity supplied is one point on the supply curve. b) Market for coffee i. A blight on coffee plans kills off much of the Brazilian crop. Decrease in supply. Quantity decreases, price rises. ii. The price of tea declines. Tea is a substitute. Demand for coffee falls, price declines, quantity declines. iii. Coffee is shown to cause cancer in laboratory rats. Demand falls. Quantity and price decline. iv. Coffee prices are expected to rise rapidly in the near future. Since both consumers and producers have this expectation, both change behavior. Demand increases because consumers wish to avoid future high prices by consuming now. Supply decreases because producers wish to wait to sell for a higher price later. The demand shift will increase price and quantity but the supply shift will increase price and decrease quantity. So, we know that price will increase but we cannot know the net effect on quantity unless we know the relative size of the demand and supply shifts.
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