L04 Concept_Test

Lesson 4 ConcepTest 1. The small country of Nittanyville produces only 3 things: tutoring hours, iced teas, and baseball cards. Below are the production and the prices of those 3 things over a 4-year period. Good/ Service 2014 Price 2014 Quantity 2015 Price 2015 Quantity 2016 Price 2016 Quantity 2017 Price 2017 Quantity Tutoring $30.00 15 $35.00 15 $35.00 20 $40.00 25 Iced Tea $1 100 $1.50 125 $1.75 120 $2.00 130 Baseball Cards $3.00 45 $3.00 50 $3.50 60 $4.00 65 Assume that the average urban family of four in Nittanyville consumes 3 hours of tutoring, 4 iced teas and 5 packs of baseball cards. a. If the base year is 2016, calculate the CPI for Nittanyville for each year. 2014 2015 2016 2017 $30.00 X 3 $35 X 3 $35. X 3 $40.00 X 3 $1.00 X 4 $1.50 X 4 $1.75 X 4 $2.00 X 4 $3.00 X5 $ 3.00 X 5 $ 3.50 X 5 $ 4.00 X 5 Total: $109.00 $126.00 $129.50 $148.00 CPI: 84.2 97.3 100.0 114.3 Note: CPI in year x = (cost of market basket in year x/cost of market basket in base year) X 100. Therefore,  CPI 2014 = 109/129.5 X 100 = 84.2  CPI 2015 = 126/129.5 X 100 = 97.3  CPI 2016 = 129.5/129.5 X 100 = 100  CPI 2017 = 148/129.5 X 100 = 114.3

b. Calculate the inflation rate in the year 2015 using the CPI information.  ((97.3-84.2)/84.2) X 100 =15.6% 2. The CPI in 1990 was 131, and the CPI in 2010 was 218. If you earned a salary of $40,000 in 1990, what would be a salary with equivalent purchasing power in 2010?  40000 X (218/131) = $66,564.89 3. The nominal minimum wage at the end of 1995 was $4.25. At the end of 1968 the nominal minimum wage was $1.60. At the end of 1995 the CPI was 156.9. At the end of 1968 the CPI was 35.5. Which minimum wage, 1968 or 1995, had a higher purchasing power? Please show your work.  Value in 1968 = (1.60/35.5) = $4.51  Value in 1995 = (4.25/156.9) X 100 = $2.87  $1.60 in 1968 was able to purchase $4.51 in goods while it took $4.25, in 1995, to purchase $2.87 in goods. Therefore, the 1968 minimum wage had a much higher purchasing power than the 1995 minimum wage.