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# ec1ps4an - Department of Economics University of California...

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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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