Econ302-hw1-summer09-solution - Econ302 Homework Assignment...

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Econ302 Homework Assignment 1 Summer 2009 Solutions 1.  The following table shows the average retail price of butter and the Consumer  Price Index from 1980 to 2001.   ˇ 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 =  CP I 1980 CP I year X * nom ina l pr ice in yea r 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
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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.  A vegetable fiber is traded in a competitive world market, and the world price is  $9 per pound.  Unlimited quantities are available for import into the United States  at this price.   The U.S. domestic supply and demand for various price levels are  shown below. Price U.S. Supply U.S. Demand (million lbs.) (million lbs.) 3 2 34 6 4 28 9 6 22 12 8 16 15 10 10 18 12 4 a.  What is the equation for demand?  What is the equation for supply? The equation for demand is of the form Q=a-bP.  First find the slope, which is 
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This note was uploaded on 06/11/2009 for the course ECON 302 taught by Professor Toossi during the Spring '08 term at University of Illinois at Urbana–Champaign.

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Econ302-hw1-summer09-solution - Econ302 Homework Assignment...

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