ec1ps4an - Department of Economics University of...

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1 Department of Economics Prof. Kenneth Train University of California, Berkeley Fall Semester 2009 ECONOMICS 1 Problem Set 4 -- Suggested Answers I. Measurement of Price Changes. In Merryland, there are only 3 goods: popcorn, movie shows, and diet drinks. The following table shows the prices and quantities produced of these goods in 1980, 1990, and 1991: 1980 1990 1991 P Q P Q P Q Popcorn 1.00 500 1.00 600 1.05 590 Movie Shows 5.00 300 10.00 200 10.50 210 Diet Drinks 0.70 300 0.80 400 0.75 420 Note: The quantities (Q) in the table above are not used in answering the questions below. These would be used, however, to calculate both GDP and the GDP deflator. (The GDP deflator is the price index associated with GDP, where the bundle of goods under consideration is the aggregate output of the economy. It is used to convert between nominal and real GDP.) a) A "market bundle" for a typical family is deemed to be 5 popcorn, 3 movie shows, and 3 diet drinks. Compute the consumer price index (CPI) for each of the three years, using 1980 as the base year. The consumer price index for 1980 is 100. This is easily seen: () () () () () () 100 100 0.70 3 5.00 3 1.00 5 0.70 3 5.00 3 1.00 5 100 1980 in bundle market the buying of cost 1980 in bundle market the buying of cost 80 = × × + × + × × + × + × = × = CPI The consumer price index for 1990 and 1991, respectively, is:
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2 () ( ) () () () () () ( ) () () () () 5 . 176 100 0.70 3 5.00 3 1.00 5 0.75 3 10.50 3 1.05 5 100 1980 in bundle market the buying of cost 1991 in bundle market the buying of cost 2 . 169 100 0.70 3 5.00 3 1.00 5 0.80 3 10.00 3 1.00 5 100 1980 in bundle market the buying of cost 1990 in bundle market the buying of cost 91 90 = × × + × + × × + × + × = × = = × × + × + × × + × + × = × = CPI CPI b) What was the rate of inflation from 1990 to 1991, using the CPI you calculated in (a)? The rate of inflation equals the percentage change in the price index from 1990 to 1991. This is: % 3 . 4 100 169.2 2 . 169 5 . 176 100 CPI CPI CPI 90 90 91 = × = × c) Now compute the CPI for each of the three years, using 1990 as the base year instead of 1980 but using the same "market bundle." Using 1990 as the base year, the CPI for 1980, 1990, and 1991, respectively, is: () () () () ( ) () () ( ) () () ( ) () () ( ) () () ( ) () 3 . 104 100 0.80 3 10.00 3 1.00 5 0.75 3 10.50 3 1.05 5 100 1990 in bundle market the buying of cost 1991 in bundle market the buying of cost 100 100 0.80 3 10.00 3 1.00 5 0.80 3 10.00 3 1.00 5 100 1990 in bundle market the buying of cost 1990 in bundle market the buying of cost 1 . 59 100 0.80 3 10.00 3 1.00 5 0.70 3 5.00 3 1.00 5 100 1990 in bundle market the buying of cost 1980 in bundle market the buying of cost 91 90 80 = × × + × + × × + × + × = × = = × × + × + × × + × + × = × = = × × + × + × × + × + × = × = CPI CPI CPI
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3 d) What was the rate of inflation from 1990 to 1991, using the CPI you calculated in (c)? Is it
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This note was uploaded on 12/27/2009 for the course ECONOMICS intro econ taught by Professor Glennworoch during the Spring '07 term at Berkeley College.

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ec1ps4an - Department of Economics University of...

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