Econ
Partial Answer Key
Supply and Demand
1. Use the model of supply and demand to explain how a fall in the price of frozen yogurt would affect the price of ice cream and the quantity of ice cream sold. In your explanation, identify the endogenous and exogenous variables.
Considering that ice cream is a close substitute for frozen yogurt, we would expect an inward shift of the demand curve for ice cream, lowering 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 candy connoisseur. Last year, he purchased 75 Snickers bars costing $2 each and 100 Butterfinger bars costing $1.25 each. This year, he purchased 150 Snickers bars for $1.50 each and 80 Butterfinger bars for $2 each.
a. Assume that a typical consumer basket includes 50 bars of each type. Compute a consumer price index for each year and determine the percentage change in the index over the two years.
The basket cost $162.5 ($2*50+$1.25*50) in the first year and $175 ($1.50*50+$2*50) in the second year. The percent increase is 7.69% ((175-162.5)/162.5).
b. Calculate Jimmy's nominal spending on candy bars in each year. Does nominal spending increase or decrease?
Nominal spending increased: Jimmy spent $275 ($2*75+$1.25*100) in the first year and $385 ($1.50*150+$2*80) in the second year.
c. Using the first year as the base year, determine Jimmy's real spending on candy bars in each year. Does real spending increase or decrease?
Real spending increased: Using the first year as the base year, Jimmy spent $275 ($2*75+$1.25*100) in the first year and $400 ($2*150+$1.25*80) in the second year.
d. Calculate the implicit price deflator (defined as nominal spending divided by real spending). How does this deflator compare the CPI calculated in part (a)? Which measurement do you think is more relevant in
Supply and Demand
1. Use the model of supply and demand to explain how a fall in the price of frozen yogurt would affect the price of ice cream and the quantity of ice cream sold. In your explanation, identify the endogenous and exogenous variables.
Considering that ice cream is a close substitute for frozen yogurt, we would expect an inward shift of the demand curve for ice cream, lowering 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 candy connoisseur. Last year, he purchased 75 Snickers bars costing $2 each and 100 Butterfinger bars costing $1.25 each. This year, he purchased 150 Snickers bars for $1.50 each and 80 Butterfinger bars for $2 each.
a. Assume that a typical consumer basket includes 50 bars of each type. Compute a consumer price index for each year and determine the percentage change in the index over the two years.
The basket cost $162.5 ($2*50+$1.25*50) in the first year and $175 ($1.50*50+$2*50) in the second year. The percent increase is 7.69% ((175-162.5)/162.5).
b. Calculate Jimmy's nominal spending on candy bars in each year. Does nominal spending increase or decrease?
Nominal spending increased: Jimmy spent $275 ($2*75+$1.25*100) in the first year and $385 ($1.50*150+$2*80) in the second year.
c. Using the first year as the base year, determine Jimmy's real spending on candy bars in each year. Does real spending increase or decrease?
Real spending increased: Using the first year as the base year, Jimmy spent $275 ($2*75+$1.25*100) in the first year and $400 ($2*150+$1.25*80) in the second year.
d. Calculate the implicit price deflator (defined as nominal spending divided by real spending). How does this deflator compare the CPI calculated in part (a)? Which measurement do you think is more relevant in