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PROBLEMS AND APPLICATIONS

1. Suppose that the, residents of Proteinland spend all of their incomes on ham, chicken, and roast beef In 2006″ they buy 50 pounds of ham for \$150, 35 pounds of chicken for \$140, and 100 pounds of roast beef for \$500. In 2007, they buy 35 pounds of ham for \$140, 50 pounds of chicken for \$200 and 100 pounds of roast beef for \$600.

a. Calculate the price of each meat in each year.

b. Using 2006 as the base year, calculate the CPI for each year.

c. What is the inflation rate for 2007?

2. Go to the website of the Bureau of Labor Statistics (http: www.v.bls.gov) and find data on the consumer price index. By how much has the index including all items risen over the past year? For which categories of spending have prices risen the most? The least? Have any categories experienced price declines? Can you explain any of these ?

3. Suppose that people consume only three goods, as shown in this table.

a. What is the percentage change in the price of each of the three goods?

b. Using a method are to the consumer price index, compute the percentage change in the overall price level.

c. If you were to learn that a bottle of Gatorade increased in size from 2006 and 2007, should that information affect your calculation of the inflation rate? If so, how?

d. If you were to learn that Gatorade introduced new flavors in 2007, should that information affect your calculation of the inflation rate? If so, how?

4. Beginning in 1994, environmental regulations have required that gasoline contain a new additive to reduce air pollution. This requirement raised the cost of gasoline. The Bureau of Labor Statistics I decided that this increase in cost represented an improvement in quality.

a. Given this decision, did the increased cost of gasoline raise the CPI?

b. What is the argument in favor of the BLS’s decision? What is the argument for a different decision?

5. Which of the problems in the construction of the CPI might be illustrated by each of the following situations? Explain.

a. the invention of the Sony Walkman

b. the introduction of air bags in cars

c. increased personal computer purchases in response to a decline in their price

d. more scoops of raisins In  package of Raisin Bran e. greater use of fuel-efficient cars after gasoline prices increase

6. The New York Times cost \$0.15 in 1970 and \$0.75 in 2000. The average wage in manufacturing was \$3.23 per hour in 1970 and \$14.32 in 2000.

a. By what percentage did the price of a newspaper rise?

b. By what percentage did the wage rise?

c. In each year, how many minutes does a worker have to work to earn enough to buy a newspaper?

d. Did workers’ purchasing power in terms of newspapers rise or fall?

7. The chapter explains that Social Security benefits are increased each year in proportion to the increase in the CPI, even though most economists. believe that the CPI overstates actual inflation.

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