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=abP.
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=a2P. To find a, plug in any of the price quantity demanded points from
the table:
Q=34=a2*3 so that a=40 and demand is Q=402P.
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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 Spring '08
 TOOSSI
 Supply And Demand, Qd

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