4. Consider the following price data for a set of goods. 2006 2007 1.30 1.25 21.15...

 

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4. Consider the following price data for a set of goods. 2006 2007 1.30 1.25 21.15 32.20 97.00 96.80 80.68 70.45 Food Toys 1.20 10.20 Transportation 95.00 100.20 2005 Phone 2008 1.50 35.50 97.52 60.54 a. Economists think the appropriate market basket is: 100 units of food, 10 toys, 1 transportation, and 1 phone. Compute the price of the market basket in each year. b. Using 2005 as the base year, compute the price index for this market basket for each year. c. Find the inflation rate for each year after 2005. d. Now, suppose a different economist thinks that it is ridiculous to include toys in the market basket, and believes that most households have at least 2 phones. This economist uses the basket: 100 units of food, 1 transportation, and 2 phones. Compute the price of the market basket in each year. e. Using 2005 as the base year, compute the price index for this new market basket for each year. f. Find the inflation rate for each year after 2005 using this new basket. Why are the inflation rates so different when using this new basket? g. Imagine that you indeed really like toys (so you use the market basket from (a)). Your nominal wage in 2006 is $22 per hour. You get a raise to $27 in 2007. Which wage offers more purchasing power in its respective year? h. Using the same basket as in (g), what would your wage need to be in 2007 in order to have the same purchasing power as your $22 wage in 2006? 4. Consider the following price data for a set of goods. 2006 2007 1.30 1.25 21.15 32.20 97.00 96.80 80.68 70.45 Food Toys 1.20 10.20 Transportation 95.00 100.20 2005 Phone 2008 1.50 35.50 97.52 60.54 a. Economists think the appropriate market basket is: 100 units of food, 10 toys, 1 transportation, and 1 phone. Compute the price of the market basket in each year. b. Using 2005 as the base year, compute the price index for this market basket for each year. c. Find the inflation rate for each year after 2005. d. Now, suppose a different economist thinks that it is ridiculous to include toys in the market basket, and believes that most households have at least 2 phones. This economist uses the basket: 100 units of food, 1 transportation, and 2 phones. Compute the price of the market basket in each year. e. Using 2005 as the base year, compute the price index for this new market basket for each year. f. Find the inflation rate for each year after 2005 using this new basket. Why are the inflation rates so different when using this new basket? g. Imagine that you indeed really like toys (so you use the market basket from (a)). Your nominal wage in 2006 is $22 per hour. You get a raise to $27 in 2007. Which wage offers more purchasing power in its respective year? h. Using the same basket as in (g), what would your wage need to be in 2007 in order to have the same purchasing power as your $22 wage in 2006?

Answer rating: 100% (QA)

a The price of the market basket in each year is 2005 Food 120 120 units Toys 1020 102 units Transportation 9500 950 units Phone 10020 1002 units 2006 Food 130 130 units Toys 2115 211 units Transporta... View the full answer