Scribd
Upload
20 views3 pages

Lesson 4 ConcepTest

Uploaded by

jongmyeong WEE
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
20 views3 pages

Lesson 4 ConcepTest

Uploaded by

jongmyeong WEE
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 3

Lesson 4 ConcepTest

1. The small country of Nittanyville produces only 3 things: tutoring hours, iced
teas, and baseball cards. Below are the production and the prices of those 3
things over a 4-year period.
2014 2015 2016 2017
Good/ 2014 2015 2016 2017
Quant Quant Quant Quant
Service Price Price Price Price
ity ity ity ity
$30.
$35. $35. $40.
Tutoring 00 15 15 20 25
00 00 00
$1 $1.5 $1.7 $2.0
Iced Tea 100 125 120 130
0 5 0
Baseball $3.0 $3.0 $3.5 $4.0
45 50 60 65
Cards 0 0 0 0
Assume that the average urban family of four in Nittanyville consumes 3 hours of
tutoring, 4 iced teas and 5 packs of baseball cards.
a. If the base year is 2016, calculate the CPI for Nittanyville for each year.

- Tutoring = 3 hours
Iced Tea: 4 iced teas
Baseball Cards: 5 packs

Cost = (Tutoring Price * 3) + (Iced Tea Price * 4) + (Baseball Cards Price *


5)

In 2014:
(30 * 3) + (1 * 4) + (3 * 5) = 90 + 4 + 15 = 109

In 2015:
(35 * 3) + (1.5 * 4) + (3 * 5) = 105 + 6 + 15 = 126

In 2016 (the base year):


(35 * 3) + (1.75 * 4) + (3.5 * 5) = 105 + 7 + 17.5 = 129.5

In 2017:
(40 * 3) + (2 * 4) + (4 * 5) = 120 + 8 + 20 = 148

CPI = (Cost of the Market in Given Year / Cost of Market in Base Year) *
100

CPI for 2014:


(109 / 129.5) * 100 = 84.18

CPI for 2015:


(126 / 129.5) * 100 = 97.30

CPI for 2016 (the base year):


(129.5 / 129.5) * 100 = 100

CPI for 2017:


(148 / 129.5) * 100 = 114.28

Therefore, the CPI for each year from 2014 to 2017:


- 2014: 84.18
- 2015: 97.30
- 2016: 100 (Base Year)
- 2017: 114.28

b. Calculate the inflation rate in the year 2015 using the CPI information.
- Inflation Rate = ((CPI in 2015 – CPI in 2014) / CPI in 2014) * 100

Since CPI in 2015 is 97.30 and CPI in 2014 is 84.18, the inflation rate in the
year 2015 is:
((97.30 - 84.18) / 84.18) * 100 = (13.12 / 84.18) * 100 = 15.59%

Therefore, the inflation rate in the year 2015 is 15.59%


2. The CPI in 1990 was 131, and the CPI in 2010 was 218. If you earned a
salary of $40,000 in 1990, what would be a salary with equivalent
purchasing power in 2010?

- Equivalent Salary = Old Salary * (CPI in New Year / CPI in Old Year)
Equivalent Salary = 40,000 * (218 / 131) = 40,000 * 1.6641 = 66564.89, or
66565.

Therefore, a salary of $66,565 in 2010 would have the equivalent purchasing


power with $40,000 in 1990.

3. The nominal minimum wage at the end of 1995 was $4.25. At the end of
1968 the nominal minimum wage was $1.60. At the end of 1995 the CPI
was 156.9. At the end of 1968 the CPI was 35.5. Which minimum wage,
1968 or 1995, had a higher purchasing power? Please show your work.

- Transforming the wages from 1968 to 1995:

Real Wage in Base Year Dollars = Nominal Wage * (CPI in Base Year / CPI
in Wage Year)

Since 1968 nominal minimum wage: $1.60,


CPI in 1968: 35.5,
CPI in 1995: 156.9.

1968 Wage in 1995 Dollars = 1.60 * (156.9 / 35.5) = 1.60 * 4.42 = $7.07.
The 1968 minimum wage is equal to approximately $7.07 in 1995 dollars .
1995 nominal minimum wage: $4.25

Since $7.07 (1968 minimum wage converted to 1995 dollars) is greater than
$4.25 (1995 nominal wage), the minimum wage in 1968 had a higher
purchasing power than the minimum wage in 1995.

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy