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Econ302-hw1-spring11-solution

# Econ302-hw1-spring11-solution - Econ302 Homework Assignment...

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Econ302 Homework Assignment 1 Spring 2011 Solutions 1. a. The reward for the capture of Jesse James was \$500.00 in 1881. Suppose the CPI in 1881 was 0.25. What is the real value of the reward in 1990 dollars if the CPI was 130.7 in 1990? Base year is 1990 and current year is 1881. Real value of the reward in 1880 = 1990 1881 CPI CPI .nominal value of the reward in 1881 Real value of the reward in 1880 = 130.7/0.25*(\$500) = 130.7(\$2,000) = \$261,400. b. The CPI in 1970 was 38.8 and in 1998 the CPI was 163.0. If the real value of a 1970 gallon of milk in terms of 1998 dollars is \$0.70, what was the nominal price of milk in 1970? Base year is 1998 and current year is 1970. Real price of a gallon of milk in 1970 = 1998 1970 CPI CPI . Nominal price of a gallon of milk in 1970 \$0.70 = 163/38.8 * Nominal price of a gallon of milk in 1970 Nominal price of a gallon of milk in 1970 = 38.8(\$0.70)/163 = \$0.17. c. The following is a list of prices for housing in five different countries along with their CPI. For which country is the real cost of housing declining? Use year 2 as the base year in your answer. Country Year 1 2 Housing Costs CPI Housing Costs CPI Argentina 37 121 32 97 Egypt 42 98 45 89 Italy 61 157 78 177 Spain 53 143 57 169 United States 25 100 33 103 The real cost of housing in Spain has decreased. The real cost of year 1 housing in year 2 is (169/143)53 = \$62.64. This exceeds the real cost of year 2 housing in year 2, \$57.00. Thus, housing costs have declined in Spain.

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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 Q P 6 3 2 b . You can figure this out by noticing that every time price increases by 3, quantity demanded falls by 6 million pounds. Demand is now Q=a-2P. To find a, plug in any of the price quantity demanded points from the table: Q=34=a-2*3 so that a=40 and demand is Q=40-2P. The equation for supply is of the form Q = c + dP. First find the slope, which is Q P 2 3 d .
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Econ302-hw1-spring11-solution - Econ302 Homework Assignment...

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