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ps1-sol - Economics 330T Fall 2009 Problem Set 1 SOLUTIONS...

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Economics 330T: Fall 2009 Helen Schneider Problem Set 1 SOLUTIONS I. Medical Care Costs 1. The CPI for hospital care (as one example) measures the cost of a two-person “hospital room and board” charge as an important part of the CPI hospital index. The cost of a day in the hospital has increased from $200 in 1970 to $1400 in 2000. The CPI was 38.8 in 1970 and 172.2 in 2000 and the Medical CPI was 34.0 in 1970 and 260.8 in 2000. (a) No, prices provided are nominal prices. Accounting for inflation using the general CPI reduced the price increase from $200 to $315.45 in 1970 dollars which is not nearly so dramatic. If you use the medical CPI, the price actually decreased from $200 to $182.52 in 1970 dollars. Alternatively, you may look at percentage changes in the CPI and express everything in year 2000 dollars. For example, percentage increase in medical care CPI is 6.67 ( 34 34 8 . 260 - ) while percentage change in the cost of a hospital bed is only 6 ( 200 200 1400 - ). Thus, hospital bed is actually cheaper than what we would expect if we account for medical care inflation. You may use different ways of accounting for inflation but your final answers will be the same.
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