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Unformatted text preview: Econ302 Homework Assignment 1 Fall 2008 Solutions 1. The following table shows the average retail price of butter and the Consumer Price Index from 1980 to 2001. 1980 1985 1990 1995 2000 2001 CPI 100 130.58 158.62 184.95 208.98 214.93 Retail Price of butter $1.88 $2.12 $1.99 $1.61 $2.52 $3.30 (salted, grade AA, per lb.) a. Calculate the real price of butter in 1980 dollars. Has the real price increased/decreased/stayed the same since 1980? Real price of butter in year X = CPI 1980 CPI year X * nominal price in year X . 1980 1985 1990 1995 2000 2001 $1.88 $1.62 $1.25 $0.87 $1.21 $1.54 Since 1980 the real price of butter has decreased. b. What is the percentage change in the real price (1980 dollars) from 1980 to 2001? Percentage change in real price from 1980 to 2001 = 1.54 1.88 1.88 =  0.18 =  18% . c. Convert the CPI into 1990 = 100 and determine the real price of butter in 1990 dollars. To convert the CPI into 1990=100, divide the CPI for each year by the CPI for 1990. Use the formula from part (a) and the new CPI numbers below to find the real price of milk. New CPI 1980 63.1 Real price of milk 1980 $2.98 1985 82.3 1985 $2.58 1990 100 1990 $1.99 1995 116.6 1995 $1.38 2000 131.8 2000 $1.91 2001 135.6 2001 $2.43 d. What is the percentage change in the real price (1990 dollars) from 1980 to 2001? Compare this with your answer in (b). What do you notice? Explain. Percentage change in real price from 1980 to 2001 =  =  =  2.43 2.98 0.18 18% 2.98 . This answer is almost identical (except for rounding error) to the answer received for part b. It does not matter which year is chosen as the base year. 2. Use supply and demand curves to illustrate how each of the following events would affect the price of butter and the quantity of butter bought and sold: a. An increase in the price of margarine. Most people consider butter and margarine to be substitute goods. An increase in the price of margarine will cause people to increase their consumption of butter, thereby shifting the demand curve for butter out from D 1 to D 2 in Figure 2.2.a. This shift in demand will cause the equilibrium price to rise from P 1 to P 2 and the equilibrium quantity to increase from Q 1 to Q 2 . D 1 D 2 P 1 P 2 S Price Quantity of Butter Q 1 Q 2 Figure 2.2.a b. An increase in the price of milk....
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This note was uploaded on 09/05/2008 for the course ECON 302 taught by Professor Toossi during the Fall '08 term at University of Illinois at Urbana–Champaign.
 Fall '08
 TOOSSI

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