ECON 0110 Lecture Notes - Lecture 8: Market Basket
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You are given the following table of prices:
|
Item |
Price in 2013 |
Price in 2014 |
|
1 Loaf of Bread |
$ 1.00 |
$ 1.50 |
|
1 Pound of Chicken |
$ 6.25 |
$ 7.00 |
|
1 Gallon of Milk |
$ 2.00 |
$ 3.00 |
|
1 Gallon of Gasoline |
$ 3.00 |
$ 2.80 |
|
1 year of cable (TV and Internet) |
$ 840.00 |
$ 960.00 |
|
1 Pair of Jeans |
$ 50.00 |
$ 60.00 |
|
1 year of Rent for Apartment |
$ 8,400.00 |
$ 9,000.00 |
To represent the purchases of the average consumer throughout the year, the government uses the following market basket:
52 loaves of bread, 30 pounds of chicken, 35 gallons of milk, 416 gallons of gasoline, 1 year of cable, 12 pairs of jeans, 1 year of rent for an apartment.
a.Calculate the cost of the market basket in 2013 and the cost of the market basket in 2014.
b.Using 2013 as the base year, calculate the CPI for 2013 and 2014.
c.Calculate the CPI inflation rate between 2013 and 2014.
d.Now suppose the nominal wage of an individual for 2013 and 2014 is given as follows:
|
Year |
Nominal Wage |
|
2013 |
$ 56.00 |
|
2014 |
$ 60.00 |
(i)What is the percentage change in the nominal wage between 2013 and 2014?
(ii)Calculate the real wage for both years in 2013 dollars (i.e. using 2013 as the base year).
(iii)What is the percentage change in the real wage between 2013 and 2014?
(iv)Has the purchasing power of the worker increased or decreased between 2013 and 2014? Explain how you know this (using a previous calculation from above).
You have been hired as a business analyst by Big Daddyâs Quik-ee Mart. Big Daddy has collected demand data on 3 products that he sells: Gasoline, Milk and Little Mamaâs Chocolate Cookiesâ¢. The data is presented in the tables on the next page. Currently all three of these products are priced at $3.50 per unit. Big Daddy would like you to use this data and your knowledge of the price elasticity of demand to make suggestions about pricing strategies that might increase revenues for the Quik-ee Mart.
There is one problem. When Junior (Big Daddyâs son) collected the data, he forgot to label the columns in the spread sheet, so now there is no way to tell which data goes with which of the 3 goods.
Big Daddy is very well known in the local community, so performing well on this job will guarantee you many more consulting jobs in town. Even though there is an important piece of information missing you must still try to help Big Daddy.
Use the data to calculate the arc elasticity of demand for each product using each pair of prices and quantities. (That is, calculate the arc elasticity between $2.00 and $2.50, between $2.50 and $3.00, etc.).
Given what you know about the price elasticity of demand, can you now guess which set of data belongs to which product? Explain your reasoning.
Assuming that you are correct in your guesses, provide some sales and marketing advice to Big Daddy. What sort of pricing changes could Big Daddy implement to increase total revenue?
Format of your answers:
You should present your conclusions and suggestions to Big Daddy in the form of a memo. Remember when drafting the memo that Big Daddy is a busy business executive. Give him your suggestions, and explain your reasoning, succinctly and in as non-technical terms as possible. Attach an appendix that includes your completed data tables with the arc elasticities, along with a sample calculation showing how the elasticities were found. The appendix can also include any other background material you feel is relevant and include references to any external resources you may have consulted in preparing your report.
Extra Credit:
In addition to the price elasticity of demand, Chapter 3 discusses several other demand elasticities. Might any of these be relevant to this problem? Explain. If possible, suggest additional data that Junior could collect to add to this analysis and what findings you would expect (again, based on your knowledge of gasoline, milk and cookies).
Data for Good 1
| Price | Quantity Demanded | Arc Elasticity |
| $2.00 | 280 | - |
| $2.50 | 260 | -0.3333 |
| $3.00 | 240 | -0.44 |
| $3.50 | 220 | -0.56521 |
| $4.00 | 200 | -0.7143 |
| $4.50 | 180 | -0.8947 |
Data for Good 2
| Price | Quantity Demanded | Arc Elasticity |
| $2.00 | 230 | - |
| $2.50 | 225 | -0.0989 |
| $3.00 | 220 | -0.1236 |
| $3.50 | 215 | -0.1494 |
| $4.00 | 210 | -0.1765 |
| $4.50 | 205 | -0.2048 |
Data for Good 3
| Price | Quantity Demanded | Arc Elasticity |
| $2.00 | 510 | - |
| $2.50 | 413 | -0.9458 |
| $3.00 | 315 | -1.4808 |
| $3.50 | 218 | -2.3659 |
| $4.00 | 120 | -4.3491 |
| $4.50 | 23 | -11.5315 |
*I was able to calculate all of the math (hopefully correct), but am having issues with the guesses; economics has always really stumped me and I seriously get confused about inelasticity and cpuld really use some help figuring that out. I'm also a little confused by what he means by memo, my professor is really vague most of the time.
