Scribd
Upload
2 views

Lesson 4 ConcepTest

Uploaded by

jongmyeong WEE
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
2 views

Lesson 4 ConcepTest

Uploaded by

jongmyeong WEE
Copyright
© © All Rights Reserved
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