Econ302-hw1-solutions-spring08-1

Econ302-hw1-solutions-spring08-1 - Econ302 Homework...

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Econ302 Homework Assignment 1 Spring 2008 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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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
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Econ302-hw1-solutions-spring08-1 - Econ302 Homework...

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