Problem 2.6: Consider an economy that produces and consumes bread and automobiles. In the

following table are data for two different years:

Year 2000 2010

Price of an automobile USD 50,000 USD 60,000

Price of a loaf of bread USD 10 USD 20

Number of automobiles produced 100 120

Number of loaves of bread produced 500,000 loaves 400,000 loaves

Problem 2.7: Abby consumes only apples. In year 1, red apples cost one dollar each, green

apples cost two dollars each, and Abby buys 10 red apples. In year 2, red apples cost two

dollars, green apples cost one dollar, and Abby buys 10 green apples.

2.7a. Compute a consumer price index for apples for each year. Assume that year 1 is the base

year in which the consumer basket is fixed. How does your index change from year 1 to year

2?

2.7b. Compute Abby's nominal spending on apples in each year. How does it change from

year 1 to year 2?

2.7c. Using year 1 as the base year, compute Abby's real spending on apples in each year.

How does it change from year 1 to year 2?

2.7d. Defining the implicit price deflator as nominal spending divided by real spending,

compute the deflator for each year. How does the deflator change from year 1 to year 2?

2.7e. Suppose that Abby is equally happy eating red or green apples. How much has the true

cost of living increased for Abby? Compare this answer to your answers to parts (a) and (d).

What does this example tell you about Laspeyres and Paasche price indices?

Problem 2.8: Consider how each of the following events is likely to affect real GDP. Do you

think the change in real GDP reflects a similar change in economic well-being?

2.8a. A hurricane in Florida forces Disney World to shut down for a month.

2.8b. The discovery of a new, easy-to-grow strain of wheat increases farm harvests..

2.8c. Increased hostility between unions and management sparks a rash of strikes.

2.8d. Firms throughout the economy experience falling demand, causing them to lay off

workers.

2.8e. Congress passes new environmental laws that prohibit firms from using production

methods that emit large quantities of pollution.

2.8f. More high-school students drop out of school to take jobs mowing lawns.

2.8g. Fathers around the country reduce their work-weeks to spend more time with their

children.r