Question One (40 points)

1.The consumer price index for the current year measures the cost of a standard basket in the _____ year relative to the cost of the same basket in the _____ year.

a)current; base

b)current; current

c)base; index

d)base; current

The CPI for current year measures the measures the cost of basket in current year with respect to base year.

Option A is correct.

2.Suppose that the total expenditures for a typical household in 2000 equaled $4,000 per month, while the cost of purchasing exactly the same items in 2005 was $4,500. If 2000 is the base year, the CPI for 2000 equals:

a)0.83

b)1.00

c)1.20

d)1.25

If 2000 is base year, CPI for 2000 equals 1 while CPI for 2005 equals [(4,500 - 4,000) / 4,000] * 100 = 112.5

Option B is correct.

3.The typical family on the Planet Econ consumes 10 pizzas, 7 pairs of jeans, and 20 liters of milk. In 2004 pizzas cost $10 each, jeans cost $40 per pair, and milk cost $3 per liter. In 2005, the price of pizzas went down to $8 each, while the price of jeans and milk remained the same. Between 2004 and 2005, a typical family's cost of living:

a)increased by 4.5 percent.

b)decreased by 4.5 percent.

c)remained the same.

d)decreased by 20 percent.

CPI in 2004 = Price of Pizza * Quantity consumed of Pizza + Price of Jeans * Quantity consumed of Jeans + Price of Milk * Quantity consumed of Milk = 10 * 10 + 40 * 7 + 3 * 20 = 440

CPI in 2004 = Price of Pizza * Quantity consumed of Pizza + Price of Jeans * Quantity consumed of Jeans + Price of Milk * Quantity consumed of Milk = 8 * 10 + 40 * 7 + 3 * 20 = 420

CPI went down = [(420 - 440) / 440] * 100 by 4.5%

Option B is correct.

4.If the Consumer Price Index increased from 1.52 to 1.65, then it must be the case that _____ relative to prices in the base year.

a)all prices rose

b)the weighted average level of prices rose

c)all prices fell

d)some prices rose and some prices fell

It means that weighted average level of price have increased given the basket of goods.

Option B is correct.

5.A consumer expenditure survey reports the following information on consumer protein spending:

2005

2006

Price

Quantity

Price

Quantity

Fish

$5

7

$5

7

Chicken

$3

10

$4

12

Beef

$6

5

$7

10

Using 2005 as the base year, by how much does a "cost of protein" index increase between 2005 and 2006?

a)5.2%

b)8.6%

c)15.7%

d)14.3%

a.... ( 15.7)

CPI = (Cost of a market basket in the current year 2006 minus the cost of a market basket in the previous year 2005)

a hundred

In the base year (2005), the cost of a market basket =(57)+(310)+(65) =35+30+30 =95.

Cost of a market basket (current price but base year quantity) = (5+7)+(104)+(57)=35+40+35=110

(110/95)100=115.79 CPI

As a result, the cost of protein index has risen by 15.7 percent.

6.A consumer expenditure survey reports the following information on entertainment spending:

2005

2006

Price

Quantity

Price

Quantity

Movies

$7

7

$15

7

Concerts

$30

2

$35

12

CDs

$16

5

$8

10

Using 2005 as the base year, by how much does a "cost of entertainment" index increase between 2005 and 2006?

a)13.75%

b)8.65%

c)13.43%

d)34.92%

Cost of market basket in the base year (2005) = (77)+(302)+(165)=49+60+80=189

(Note For cost of market basket in the base year we take base year price and quantity)

Cost of same basket in the current year =(157)+(352)+(85)=105+70+40=215

( For cost of market basket in the current year we take base year quantity but current year price)

CPI= (215/189)100=113.75

(Note For cost of market basket in the base year we take base year price and quantity)

Cost of same basket in the current year =(157)+(352)+(85)=105+70+40=215

( For cost of market basket in the current year we take base year quantity but current year price)

CPI= (215/189)100=113.75

7.Which of the following is a real quantity?

a)the current wages paid to factory workers

b)the cost of a new car

c)the number of tons of steel produced in 2005

d)the current price of a barrel of oil

Number of tons of steel produced in 2005)

Other given options are nominal quantity, but this option gives us the real quantity.

8.A factory worker earned $12 an hour in 1980. The CPI was 0.82 in 1980. The same factory worker was earning $15 an hour in 1990 when the CPI was 1.40. From 1980 to 1990, the factory worker's hourly real wage:

a)increased from $8.57 to $18.29.

b)decreased from $14.63 to $10.71.

c)remained constant.

d)increased from $12 to $15.

b ( decreased from $14.66 to $10.71)

Explanation:-

CPI= ( nominal wage/real wage)

Real wage (1980)= nominal wage/CPI = 12/0.82=14.63

Real wage (1990)= nominal wage/CPI= 15/1.4 =10.71

Thus the real wage fall from $14.63 to $10.71

Question Two (20 points)

How would each of the following likely affect the real wage and employment of unskilled workers on an automobile plant assembly line? Justify your answer.

a)Demand for the type of car made by the plant increases.

When demand for the type of car made by the plant increases, they will have to employ more workers to expand production in order to meet the increasing demand. Ultimately demand for workers will increase .Now to employ more workers , wages will have to be increased. Real wage and employment will thus increase.

b)A sharp increase in the price of gasoline causes many commuters to switch to public transportation.

This will decrease demand for cars which will lead to fall in revenue. To earn profit, while revenue falls, plant would cut its cost by laying off workers and cutting wages. Also due to fall in Demand for workers ,workers will be readily available to take up job at lower wages .

Hence real wages and employment decreases

c)Because of alternative opportunities, people become less willing to do factory work.

Because of alternative opportunities, reservation wage ( which is the lowest wage at which worker will be willing to accept a particular type of job , here job at plant) rises. Also workers will shift towards better alternative , hence plant may face difficulties in retaining its employees. Overall employment of workers in the economy increases in this case. But employees in the plant may fall. Wages will increase.

d)The plant management introduces new assembly-line methods that increase the number of cars unskilled workers can produce per hour while reducing defects.

If workers can produce more within a hour, it implies that their productivity has increased. As productivity of labor increases wages increases . Employment of workers increases with increase in productivity.

e)Robots are introduced to do most basic assembly-line tasks.

If robots are used to substitute workers, the demand for workers will fall, plant may layoff workers . This will decrease reservation wage of workers. Thus if robots are used , both employment and wages of workers falls.

Question Three (20 points)

a)Production data for Badr's Bicycle Factory are as follows:

Number of workers

Bikes assembled per day

1

24

3

64

5

96

7

120

9

136

Other than wages, Badr has costs of $200 (for parts and so on) for each bike assembled.

Bikes sell for $40 each. Find the marginal product and the value of the marginal product for each worker (don't forget about Badr's cost of parts).

Marginal Product is the change in Total Product as one more worker is hired. MP = change in TP/ change in labor units

As the selling price of bike is $240 and cost of capital is $200, the cost of one unit of labor must be $40. VMP = $40 x MP

b)The following table provides information about production at the XYZ-TV Company.

Number of Workers

TVs Produced

Marginal product

VMPL

0

0

1

35

35

17500

2

68

33

16500

3

99

31

15500

4

128

29

14500

5

155

27

13500

How many workers will the XYZ-TV Company hire if the going wage for TV production workers is $16,000?Show your calculation in detail.

the firm decides it labor where the wage is equal to the value of the marginal product (VMPL)

VMPL= MPL *Price

firm will hire 2 units of labor after that the VMPL is less than wage.

Comment

MPL = change in production/ change in labour

MPL = change in production/ change in labour

Question Four (20 points)

a)Define nominal quantity and real quantity.

A nominal quantity is a quantity that is measured in terms of its current Dollar value .

While a real quantity is a quantity that is corrected for price changes .It is a constant dollar value quantity which is measured in physical terms.

Deflating a normal quantity can convert it into a real quantity . This can be done by dividing nominal quantity by the price index.

(10 points)

b)Assume that the cost of basket of goods and services in the year 2010 as a base year was $1600. In 2018, it increased to $2400. Calculate the consumer price index in 2018. Interpret your answer. (10 points)

Consumer price index (2018) = (Cost of market basket in given year/ Cost of market basket in base year )*100

= (2400/1600)*100

= 150%

The consumer price index helps to measure the trends in price of consumer goods. It helps to understand whether the economy is is going towards inflation or deflation .

The value of consumer price index equal to 150 in a given year means that the price level has increased by 50% between the current year and the base year. End of questions