Question

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).