Partial Solution Key

Source and Require

1 . Utilize the model of supply and demand to explain how a fall in the cost of frozen fat free yogurt would affect the price of yummy ice cream and the amount of ice cream sold. In your explanation, identify the endogenous and exogenous parameters.

Considering that your favorite ice cream is a close substitute for iced yogurt, we might expect a great inward switch of the require curve pertaining to ice cream, decreasing both the price and quantity of ice cream. The price of frozen yogurt is the exogenous variable, while the price and quantity of ice cream are the endogenous variables.

Price Indexes

2 . Jimmy is an avid candies connoisseur. This past year, he purchased 75 Peanut bars being $2 every and 100 Butterfinger bars costing $1. 25 every. This year, this individual purchased 150 Snickers pubs for $1. 50 every single and eighty Butterfinger pubs for $2 each.

a. Assume that a normal consumer holder includes 55 bars of every type. Calculate a consumer value index for every year and determine the percentage change in the index in the two years.

The basket expense $162. 5 ($2*50+$1. 25*50) in the initially year and $175 ($1. 50*50+$2*50) inside the second 12 months. The percent increase is usually 7. 69% ((175-162. 5)/162. 5).

b. Calculate Jimmy's nominal spending on candy pubs in each year. Does nominal spending boost or decrease?

Nominal spending increased: Jimmy spent $275 ($2*75+$1. 25*100) in the initial year and $385 ($1. 50*150+$2*80) in the second 12 months.

c. Using the first 12 months as the camp year, decide Jimmy's actual spending on candies bars in each year. Truly does real spending increase or decrease?

Genuine spending elevated: Using the 1st year since the base year, Jimmy spent $275 ($2*75+$1. 25*100) inside the first 12 months and $400 ($2*150+$1. 25*80) in the second year.

m. Calculate the implicit price deflator (defined as nominal spending divided by real spending). How can this deflator compare the CPI determined in part (a)? Which measurement do you think much more relevant in determining the change in Jimmy's cost of living?

The implicit price deflator is 1 inside the first yr ($275/$275) and 0. 9625 ($385/$400) in the second 12 months. In other words, the change in the implicit cost deflator indicates deflation (overall prices heading down), even though the change in the CPI indicates inflation (overall prices heading up)!! How come the big difference? The GDP deflator changes with Jimmy's spending patterns, while the CPI does not. Jimmy switches to the cheaper Snickers, lowering his overall cost of living. The acted price deflator is more directly related to Jimmy's cost of living since it is based after his buys in annually.

e. Finally [unrelated to the problem above with Jimmy], imagine you can be a senator composing a bill to index Social Security and federal retirement benefits. That is, your bill can adjust these benefits to offset modifications in our cost of living. Will you use the GDP deflator or perhaps the CPI? So why?

Obviously there isn't a clear-cut answer. Ideally, one particular wants a measure of the retail price level that accurately catches the cost of living. Overestimating pumpiing is more costly to the government, although underestimating inflation would be more expensive for those who count on federal retirement benefits.

Factoral Circulation of Income

3. Make use of the neoclassical theory of syndication to forecast the impact within the real salary and the true rental value of capital of each with the following events:

a. A wave of immigration enhances the labor force.

Based on the neoclassical theory of division, the real salary equals the marginal merchandise of labor. Because of diminishing returns to labor, a rise in the labor force causes the marginal product of labor to fall. Hence, the actual wage declines.

b. An earthquake ruins some of the capital stock.

The real rental value equals the marginal product of capital. If an earthquake destroys some of the capital share (yet miraculously does not eliminate anyone and lower the labor force), the minor product of...

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