Test Bank to Accompany

Microeconomics
Seventh Edition by Pindyck / Rubinfeld

Pearson Education
2009 8/12/2008

Contents
Chapter1 Chapter2 Chapter3 Chapter4 Chapter5 Chapter6 Chapter7 Chapter8 Chapter9 Preliminaries ........................................................................................................................1 TheBasicsofSupplyandDemand..................................................................................16 ConsumerBehavior...........................................................................................................55 IndividualandMarketDemand...................................................................................125 UncertaintyandConsumerBehavior ...........................................................................179 Production ........................................................................................................................236 TheCostofProduction ...................................................................................................273 ProfitMaximizationandCompetitiveSupply ............................................................327 TheAnalysisofCompetitiveMarkets ..........................................................................375

Chapter10 MarketPower:MonopolyandMonopsony.................................................................438 Chapter11 PricingwithMarketPower ............................................................................................480

Chapter12 MonopolisticCompetitionandOligopoly ...................................................................528 Chapter13 GameTheoryandCompetitiveStrategy......................................................................565 Chapter14 MarketsForFactorInputs ..............................................................................................614 Chapter15 Investment,TimeandCapitalMarkets ........................................................................656 Chapter16 GeneralEquilibriumandEconomicEfficiency ...........................................................698 Chapter17 MarketswithAsymmetricInformation........................................................................743 Chapter18 ExternalitiesandPublicGoods......................................................................................787

Chapter1 Preliminaries
1) Microeconomicsisthebranchofeconomicsthatdealswithwhichofthefollowingtopics? A) Thebehaviorofindividualconsumers B) Unemploymentandinterestrates C) Thebehaviorofindividualfirmsandinvestors D) BandC E) AandC Answer: E
Diff:1 Section: 1.1

2) ARollingStonessonggoes:Youcantalwaysgetwhatyouwant.Thisechoesanimportant themefrommicroeconomics.Whichofthefollowingstatementsisthebestexampleofthis theme? A) Consumersmustmakethebestpurchasingdecisionstheycan,giventheirlimited incomes. B) Workersdonothaveasmuchleisureastheywouldlike,giventheirwagesandworking conditions. C) Workersinplannedeconomies,suchasNorthKorea,donothavemuchchoiceoverjobs. D) Firmsinmarketeconomieshavelimitedfinancialresources. Answer: A
Diff:1 Section: 1.1

3) Economicsisabouttheallocationofscarceresources.WhichofthefollowingisNOTan exampleofeconomicscarcity? A) IfStevegoestoseethemovieMasterandCommanderonSaturday,hewillnotbeableto affordbuyingicecream. B) IfJennystudiesforhereconomicsquizthisevening,shewillnothavetimetowalkher dog. C) IfGeneralMotorsincreasesitsproductionofSUVsthisyear,itwillhavetospendmore onadvertising. D) IfBordersBooksincreasesthenumberoftitlesitcarries,itwillhavetoreallocateshelf spacetoaccommodatethenewtitles. Answer: C
Diff:2 Section: 1.1

4) Avalidandusefultheoryofgoldprices: A) helpstopredictthemovementsofgoldpricesovertime. B) maybefoundedonsimplifyingassumptions. C) neednotexactlypredicteverychangeingoldprices. D) alloftheabove E) noneoftheabove Answer: D

Diff:1 Section: 1.1

5) Usethefollowingtwostatementstoanswerthisquestion: I. Economictheoriesaredevelopedtoexplainobservedphenomenabydeducingfromaset ofbasicrulesandassumptions. II. Economictheoriesusevaluejudgmentstodeterminewhichpeopleoughttopaymore taxes. A) BothIandIIaretrue. B) Iistrue,andIIisfalse. C) Iisfalse,andIIistrue. D) BothIandIIarefalse. Answer: B
Diff:1 Section: 1.1

6) Whichofthefollowingisapositivestatement? A) ThePresidentoftheUnitedStatesoughttobeelectedbyadirectvoteoftheAmerican peopleratherthantheElectoralCollege. B) Afundamentalassumptionoftheeconomictheoryofconsumerbehavioristhat consumersalwayspreferhavingmoreofanygoodtohavinglessofit. C) Becausemanyadultscannotaffordtogotocollege,taxcreditsfortuitionshouldbe introduced. D) alloftheabove E) noneoftheabove Answer: B
Diff:1 Section: 1.1

7) Whichofthefollowingisanormativestatement? A) Thetaxespaidbythepoorshouldbereducedinordertoimprovetheincome distributionintheU.S. B) Stategovernmentsshouldnotsubsidizecorporationsbytrainingwelfarerecipients. C) Presidentialcandidatesshouldnotbegivenfundsfromthefederalgovernmenttorun campaigns. D) TheseaottershouldnotbeallowedtospreadintoSouthernCaliforniacoastalwaters, becauseitwillreducethevalueoffisheries. E) alloftheabove Answer: E
Diff:1 Section: 1.1

8) Whichofthefollowingisapositivestatement? A) Intermediatemicroeconomicsshouldberequiredofalleconomicsmajorsinorderto buildasolidfoundationineconomictheory. B) Theminimumwageshouldnotbeincreasedbecausethisactionwouldincrease unemployment. C) Smokingshouldberestrictedonallairlineflights. D) Allautomobilepassengersshouldberequiredtowearseatbeltsinordertoprotectthem againstinjury. E) noneoftheabove Answer: E
Diff:1 Section: 1.1

9) Whichofthefollowingisapositivestatement? A) Whenthepriceofagoodgoesup,consumersbuylessofit. B) Whenthepriceofagoodgoesup,firmsproducemoreofit. C) WhentheFederalgovernmentsellsbonds,interestratesriseandprivateinvestmentis reduced. D) alloftheabove E) noneoftheabove Answer: D

Diff:1 Section: 1.1

10) Whichofthefollowingstatementsisfalse?Aneconomicanalysisofcarbontaxescan: A) calculatetheincreaseincostsfacedbycoal- usingindustries. B) predicttheeffectonunemploymentinWestVirginiacoalminingcommunities. C) comparethelikelyreductionsinmedicalexpendituresondiseasescausedbysmog. D) presentatrade- offofthecostsandbenefitsofdifferentlevelsofcarbontaxes. E) concludethatsuchtaxesshouldbeimposedtobenefitfuturegenerations. Answer: E
Diff:1 Section: 1.1

11) Usethefollowingtwostatementstoanswerthisquestion: I. Inordertoanswernormativequestions,itisnecessarytomakevaluejudgments. II. Inordertoconductpositiveeconomicanalysis,itisalwaysnecessarytouseempirical evidenceinadditiontoeconomictheories. A) IandIIareincorrect. B) Iiscorrect,IIisincorrect. D) BothIandIIarecorrect. C) Iisincorrect,IIiscorrect. Answer: B
Diff:1 Section: 1.1

12) __________ questionshavetodowithexplanationandprediction, __________ questionshave todowithwhatoughttobe. A) Positive;negative. B) Negative;normative. C) Affirmative;positive. D) Positive;normative. E) Econometric;theoretical. Answer: D
Diff:1 Section: 1.1

13) Thekeyassumptionunderlyingthetheoryofthefirmisthat: A) firmsareassumedtomaximizesalesrevenue. B) managersareassumedtomaximizethenumberofemployeesintheirdepartment. C) firmsareassumedtomaximizeprofits. D) noneoftheabove Answer: C

Diff:1 Section: 1.1

14) WhichofthefollowingstatementsisNOTtrue? A) Thetrade- offsfacingconsumersandproducersarebasedonprices. B) Allpricesaredeterminedbymarketinteractionsbetweenbuyersandsellers. C) Pricesserveanimportantroleinmicroeconomics. D) OnlyAandBabovefalse. E) OnlyBandCabovearefalse. Answer: B

Diff:1 Section: 1.1

15) Pleaseusethefollowingstatementstoanswerthisquestion: I. Theprocessoftestingandrevisingtheoriesiscentraltothedevelopmentofeconomicsas ascience. II. Theoryisimperfectandmaynotadequatelydescribeeconomicbehaviorinsomecases. A) IandIIaretrue. B) IistrueandIIisfalse. D) IandIIarefalse. C) IisfalseandIIistrue. Answer: A
Diff:1 Section: 1.1

16) Thetrade- offsfacingconsumersinclude: A) howtoallocateincomeacrossgoodsandserves. B) howtoallocateincomebetweenconsumptionandsavings. C) bothAandB D) noneoftheabove Answer: C

Diff:1 Section: 1.1

17) Thetrade- offsfacingworkersincludeallofthefollowingEXCEPT: A) decisiontoworkorremainoutsidetheworkforce. B) decisiontoworkorseekadditionaleducation. C) decisiontoworkforalargecorporationorasmallfirm. D) decisiontoallocatetheirtimebetweenworkandleisure. E) Alloftheabovearetrade- offsfacingworkers. Answer: E
Diff:1 Section: 1.1

18) Firmsfacetrade - offsinproduction,includingdecisionsrelatedto: A) whichproductstoproduce. B) howmuchofaparticularproducttoproduce. C) thebestwaytoproduceagivenamountofoutput. D) alloftheabove Answer: D

Diff:2 Section: 1.1

19) Whichofthefollowingmarketshasthemostrestrictivegeographicboundary? A) Themarketforretailgasoline B) Themarketforhousing C) Themarketforgold D) Themarketforbeef Answer: B

Diff:1 Section: 1.2

20) AninvestorcanacquiresharesofstockinAcmeCorporationeitherbypurchasingshareson thestockmarketorbypurchasingabondthatisconvertibleintosharesofAcmestock.After carefulstudy,theinvestordiscoversthatshecanprofitbypurchasingthebond,convertingit tosharesofstock,andsellingthestock.Thispracticeiscalled: A) sellingshort. B) arbitrage. C) profiteering. D) dumping. E) noneoftheabove Answer: B
Diff:1 Section: 1.2

21) Usethefollowingtwostatementstoanswerthisquestion: I. Amarketisacollectionofbuyersandsellersthat,throughactualorpotentialinteractions, determinethepriceforaproductorsetofproducts. II. Anindustryisacollectionofmarketsforsimilarorcloselyrelatedproducts. A) BothIandIIaretrue. B) Iistrue,andIIisfalse. C) Iisfalse,andIIistrue. D) BothIandIIarefalse. Answer: B
Diff:1 Section: 1.2

22) Inaperfectlycompetitivemarket: A) thereareafewbuyers. B) thereisasingleseller. C) thereisacartel. D) nosinglebuyerorsellercansignificantlyaffectthemarketprice. Answer: D

Diff:1 Section: 1.2

23) BoeingCorporationandAirbusIndustriesaretheonlytwoproducersoflong - range commercialaircraft.Thismarketisnotperfectlycompetitivebecause: A) eachcompanyhasannualsalesover$10billion. B) eachcompanycansignificantlyaffectprices. C) AirbusreceivessubsidiesfromtheEuropeanUnion. D) AirbuscannotsellaircrafttotheUnitedStatesgovernment. E) alloftheabove Answer: B
Diff:1 Section: 1.2

24) Whichofthefollowingareexamplesofperfectlycompetitivemarkets? A) Wheat B) Textiles C) Gold D) Thestockmarket E) alloftheabove Answer: E

Diff:1 Section: 1.2

25) AlthoughtheU.S.airlineindustryhasonlyarelativelysmallnumberofsellers,themarketis neverthelesshighlycompetitive.Thereasonisthat: A) thenumberofbuyersisverylarge. B) duetofiercecompetition,nofirmhassignificantcontroloverprices. C) duetofiercecompetition,nofirmhassignificantcontroloverthequantitysupplied. D) mostairlineroutesareservedbyrelativelymanysellers. Answer: B

Diff:2 Section: 1.2

26) WashingtonD.C.smetrotrainsystemisbeingextendedfurtherintotheneighboringstatesof MarylandandVirginia,therebyreducingthecostofcommutingintotheUnitedStatescapital. Otherthingsbeingheldconstant,thiscanbeexpectedto: A) decreasetheextentofthemarketforhousingaroundWashingtonD.C. B) increasetheextentofthemarketforhousingaroundWashingtonD.C. C) havenoeffectontheextentofthemarketforhousingaroundWashingtonD.C.asthe actualgeographyremainsunchanged. D) havenoeffectontheextentofthemarketforhousingaroundWashingtonD.C.asthe rangeofhousesavailablehasnotchanged. E) havenoeffectontheextentofthemarketforhousingaroundWashingtonD.C.as propertytaxeshavenotchanged. Answer: B
Diff:2 Section: 1.2

27) Whyismarketdefinitionimportantforeconomicdecisionmaking? A) Afirmisinterestedinknowingitsactualandpotentialcompetitors. B) Afirmwilldefineitsmarketinordertomaximizerevenue. C) Governmentregulatorsareinterestedinknowingtheeffectofmergersandacquisitions oncompetitionandpricesinaparticularmarket. D) bothAandC E) bothAandB Answer: D

Diff:1 Section: 1.2

28) Whichofthefollowingfeaturesarerelevantfordeterminingtheextentofamarket? A) Itsgeographicalboundaries. B) Technologicalinnovationsthatwouldreducethecostofproduction. C) Therangeofproductstobeincludedinit. D) bothAandB E) bothAandC Answer: E

Diff:1 Section: 1.2

29) WhichofthefollowingstatementsaboutmarketsandindustriesisTRUE? A) Amarketincludesbuyersbutnotsellers. B) Amarketincludessellersbutnotbuyers. C) Anindustryincludesbuyersbutnotsellers. D) Anindustryincludessellersbutnotbuyers. Answer: D

Diff:1 Section: 1.2

30) Althoughtherearemanyreasonswhyamarketcanbenon - competitive,theprincipal economicdifferencebetweenacompetitiveandanon - competitivemarketis: A) thenumberoffirmsinthemarket. B) theextenttowhichanyfirmcaninfluencethepriceoftheproduct. C) thesizeofthefirmsinthemarket. D) theannualsalesmadebythelargestfirmsinthemarket. E) thepresenceofgovernmentintervention. Answer: B
Diff:1 Section: 1.2

31) WhichofthefollowingcouldnotpossiblybeincludedinthesamemarketasCoke? A) Pepsi B) Gatorade C) Milk D) Bread Answer: D

Diff:1 Section: 1.2

32) Usethefollowingstatementstoanswerthisquestion: I. PoliticalcandidatesneedtoknowthegeographicalextentofthemarketforTV commercialsindetermininghowtoreachthetargetnumberofeligiblevoterswiththesmallest possibleexpenditure. II. ThegeographicalextentofthemarketforgasolineinTexaswilldeterminewhetheranoil companydrillsforoilthere. A) IandIIaretrue. B) Iistrue,andIIisfalse. C) Iisfalse,andIIistrue. D) IandIIarefalse. Answer: B
Diff:1 Section: 1.2

33) Whichofthefollowingassertions,ifproventrueinacourtoflaw,wouldhelp Archer- Daniels - Midland,amakerofcornsyrup,initsattempttoacquireanothercornsyrup producer,theClintonCornProcessingCompany? A) Archer- Daniels - Midlandisadominantproducerofcornsyrup. B) Therearenogoodsubstitutesforcornsyrupforanyofitsmajoruses. C) Archer- Daniels - MidlandandtheClintonCornProcessingCompanytogetherholdonly asmallshareofthemarketforsweetenersincludingcornsyrupandsugar. D) Archer- Daniels - Midlandproducesmanyotherdifferentagriculturalproducts,in additiontocornsyrup. Answer: C
Diff:1 Section: 1.2

34) Usethefollowingstatementstoanswerthisquestion: I. Iftheextentofamarketisbroader,itislesslikelythatfirmsinthemarketcaninfluence themarketprice. II. Indeterminingwhethertwodifferentproductsbelongtothesamemarket,itisnecessary toknowwhetherthetwoproductscanbeusedassubstitutesforeachother. A) IandIIarebothfalse. B) Iisfalse,andIIistrue. C) Iistrue,andIIisfalse. D) IandIIarebothtrue. Answer: D
Diff:2 Section: 1.2

35) Usethefollowingstatementstoanswerthisquestion: I. Thepriceforagivenproductmaydifferacrosssellersifthemarketisnotperfectly competitive. II. Asinglemarketpricedoesnotexistinimperfectlycompetitivemarkets. A) IandIIaretrue. B) IistrueandIIisfalse. D) IandIIarefalse. C) IIistrueandIisfalse. Answer: B
Diff:2 Section: 1.2

36) Supposeyouareinchargeofproductpricingandmarketingstrategyforapharmaceutical company.Youwillhavegreaterabilitytoindependentlysetpricesforyourproductif: A) therearenoclosesubstitutesforyourproduct. B) therearelotsofotherfirmssellingcloselyrelatedproductsinyourmarket. C) Yourpricingpolicyshouldnotdependonthenumberofclosesubstituteproducts. D) noneoftheabove Answer: A

Diff:2 Section: 1.2

37) Toarbitrageapricedifferencebetweentwomarkets,youshould: A) sellinthelow- pricemarketandbuyinthehigh - pricemarket. B) buyinthelow- pricemarketandsellinthehigh- pricemarket. C) sellinbothmarketstocapturealoweraveragemarketprice. D) noneoftheabove Answer: B
Diff:2 Section: 1.2

38) Arbitragingpricedifferencesbetweentwomarketsisgenerallynotpossibleif: A) therearepositivecostsoftransportingtheproductsfromonemarkettotheother. B) thetransportationcostsarelargerthanthedifferenceinprices. C) thegovernmenthasprohibitedexchangebetweenthetwomarkets. D) AandCabove E) BandCabove Answer: E

Diff:2 Section: 1.2

39) WhichofthefollowingstatementisFALSE? A) Perfectlycompetitivemarketsarecomposedofmanybuyersandsellers. B) Somemarketsmayhaveonlyafewsellersbutexhibitthepropertiesofperfect competition. C) Amarketmaybecomposedofonlyonebuyerandoneseller. D) Alloftheabovestatementsarecorrect. Answer: D

Diff:2 Section: 1.2

40) Theconstantdollarpriceis: A) therealpriceofagood. B) thenominalpriceofagoodadjustedforinflation. C) thecurrentdollarpriceadjustedforinflation. D) alloftheabove E) noneoftheabove Answer: D

Diff:1 Section: 1.3

41) WhatdoesitmeanwhentheCPIishigherthisyearthanlast? A) Therateofinflationhasincreased. B) Therehasbeeninflationsincelastyear. C) Realpriceshaveincreased. D) Realpriceshavedecreased. Answer: B

Diff:1 Section: 1.3

42) Thepriceofatacowas$0.29in1970and$0.99in1993.TheCPIwas38.8in1970and144.0in 1993.The1993priceofatacoin1970dollarsis: A) $0.08. B) $0.27. C) $0.34. D) $3.67. Answer: B

Diff:2 Section: 1.3

43) Sincelastyear,thepriceofgoldhasrisenfrom$120to$420.Whatannualinflationratewould leavetherealpriceofgoldunchangedoverthelasttwelvemonths? A) Approximately29% B) 40% C) Approximately71% D) 250% E) noneoftheabove Answer: D

Diff:2 Section: 1.3

44) Overthepastyearpriceinflationhasbeen10%,butthepriceofausedFordEscorthasfallen from$6,000to$5,000.TherealpriceofaFordEscorthasfallenby: A) 12%. B) 17% C) 20%. D) 24% E) 32%. Answer: D

Diff:2 Section: 1.3

45) Supposethenominalpriceofgasolinewas$0.90pergallonin1987.Toconvertthisvalueto therealpriceof1987gasolinein2008dollars,weshould: A) multiplybythe1987CPIanddividebythe2008CPI. B) multiplybythe2008CPIanddividebythe1987CPI. C) notdoanythingbecausethisistherealpricein2008dollars. D) noneoftheabove Answer: B

Diff:1 Section: 1.3

46) Thenominalpriceofindustrialredpaintwas$12pergallonin1993.Toconvertthisvalueto therealpriceofpaintin2008dollars,weshouldusethe: A) ConsumerPriceIndex. B) ProducerPriceIndex C) Fedfundsrate. D) 30- dayT- billrate. Answer: B
Diff:1 Section: 1.3

47) WhichofthefollowinggoodsisNOTalikelycomponentoftheConsumerPriceIndex? A) Hamburger B) 87octanegasoline C) Structuralsteelbeams D) Movietickets Answer: C

Diff:1 Section: 1.3

10

48) WhichpriceindexpublishedbytheUSfederalgovernmentrepresentswholesaleprice changes? A) ConsumerPriceIndex B) ProducerPriceIndex C) GDPdeflator D) Dow- JonesIndustrialAverage Answer: B

Diff:1 Section: 1.3

49) When1983istheCPIbaseyear,theCPIvalueis82.4for1980and172.2for2000.Supposewe wanttoconvertthisCPIseriestohaveabaseyearof2000(thatis,CPI 2000=100).Whatisthe valueoftherevisedCPIfor1980? A) 172.2 B) 100 Answer: C

Diff:1 Section: 1.3

C) 47.9

D) 209.0

50) Usethefollowingstatementstoanswerthisquestion: I. Theinflationrate(therateofchangeinthegeneralpricelevel)calculatedfromaprice indexlikeCPIisthesameregardlessofthebaseyearweusetoformthepriceindex. II. AlthoughtheCPImayindicatethegeneralpricelevelincreasedby5%lastyear,thereare someconsumerproductsthatmayhaveexperiencedmoreorlessinflationinthepastyear. A) IandIIaretrue. B) IistrueandIIisfalse. C) IisfalseandIIistrue. D) IandIIarefalse. Answer: A
Diff:1 Section: 1.3

51) WhichpriceindexpublishedbytheUSfederalgovernmentrepresentsretailpricechanges? A) ConsumerPriceIndex B) ProducerPriceIndex C) GDPdeflator D) Dow- JonesIndustrialAverage Answer: A

Diff:1 Section: 1.3

52) WhichofthefollowingisNOTanexampleofwaysinwhichmicroeconomicanalysiscanhelp FordMotorCompanyitsincorporatedecisionmaking? A) Forecastingdemandfornewautomobiles B) Determininghowmanyautomobilestoproduceinordertomaximizeprofits C) Predictinghowcompetitorswillreacttothefirmspricingstrategy D) ForecastingtheeffectofFordshiringpatternsontheU.S.unemploymentrate E) ForecastingtheeffectofanoilpriceincreaseondemandforSUVs Answer: D

Diff:1 Section: 1.4

11

53) WhichofthefollowingisNOTanexamplesofwaysinwhichmicroeconomicanalysiscan helpindesigningenvironmentalpolicy? A) Determiningtheoptimallevelofvehicletailpipeemissionsstandards B) Designinglawstoprovideincentivesforfirmstoimplementcleantechnologiesinnew vehicles C) Lobbyingconsumersandfirmstoreduceconsumptionofenergy D) Examiningthetradeoffsbetweenecologicalbenefitsofenvironmentallegislationandits impactsonconsumersstandardofliving Answer: C
Diff:1 Section: 1.4

54) ToevaluatethepotentialimpactofchangestoitsSUVbusiness,FordMotorCompanywould use: A) normativeeconomicanalysis. B) positiveeconomicanalysis. C) negativeeconomicanalysis. D) arbitrageanalysis. Answer: B

Diff:1 Section: 1.4

55) TheCleanAirActisdesignedtorestrictautomobileemissionsandreducetheexternalcostsof airpollution.TheeconomicanalysisusedtodeveloptheCleanAirActwas: A) normative. B) positive. C) macroeconomic. D) noneoftheabove Answer: A

Diff:1 Section: 1.4

56) SupposetheSocialSecurityAdministrationwouldliketoguaranteethepurchasingpowerof socialsecuritypaymentstotheelderlydoesnotdiminish.Thatis,therealvalueofthe paymentsdoesnotdecrease.TheCPIin1990was130.7andtheCPIin1998was163.0.How muchdoestheSocialSecurityAdministrationneedtoincreasepaymentsfrom1990to1998to accomplishthisobjective? Answer: Thechangeinthegeneralpricelevelis 100(163 - 130.7)/130.7 = 25%.Thus,thelevelof paymentsin1998needtobe P(1990) *(1+ 0.25).
Diff:1 Section: 1.3

57) Supposetheminimumwagewas$0.25perhourin1938andtheCPIinthatyearwas11.5.If theCPIin1990was130.7,whatistherealvalueofthe1938minimumwageintermsof1990 dollars?Therealvalueofthe1990minimumwageintermsof1990dollarsis$4.25.Hasthe realvalueoftheminimumwagedeclinedsince1938? Answer: W(1938)=130.7($0.25)/11.5 = $2.84,sotherealvalueoftheminimumwagehas increasedfrom1938to1990.

Diff:1 Section: 1.3

12

58) TherewardforthecaptureofJesseJameswas$500.00in1881.SupposetheCPIin1881was 0.25.Whatistherealvalueoftherewardin1990dollarsiftheCPIwas130.7in1990? Answer: 130.7($500)/0.25 =130.7($2,000) = $261,400.

Diff:1 Section: 1.3

59) TheCPIin1970was38.8andin1998theCPIwas163.0.Iftherealvalueofa1970gallonof milkintermsof1998dollarsis$0.70,whatwasthenominalpriceofmilkin1970? Answer: 38.8($0.70)/163 =$0.17.

Diff:2 Section: 1.3

60) Thenominalpriceofmilkwas$2.25in1998whiletheCPIwas163.0thatyear.Also,theCPI in1970was38.8.Whatwastherealvalueof1998milkintermsof1970dollars? Answer: 38.8($2.25)/163 =$0.54.

Diff:2 Section: 1.3

61) Thenominalpriceofa1990laptopwas$3,500andtheCPIthatyearwas130.7.Thenominal priceofalaptopin1998was$1,600andtheCPIthatyearwas163.0.Whatistherealpriceofa 1998laptopintermsof1990dollars?Bywhatpercenthastherealpriceoflaptopschanged? Answer: 130.7($1,600)/163=$1,283.Percentdeclineintherealvalueoflaptops: - 100($1,283- $3,500)/$3,500 =$2,217(100)/$3,500 =63.34%
Diff:2 Section: 1.3

62) ThepricetoattendaNBAbasketballgameinChicagois$55whiletheCPIinChicagois153. TheCPIinCharlotteis108whilethepricetoattendaNBAbasketballgameis$52.Whichcity offersasmallerrealcostofattendingaNBAbasketballgame? Answer: Chicagorealvalue[NBA(Charlotte)] = 153(52)/108 = $73.67. Therealvalueofagamein CharlotteexceedstherealvalueofagameinChicago.Chicagooffersasmallerrealcost ofattendingagame.
Diff:2 Section: 1.3

13

63) ThefirstcolumnofthefollowingtabledescribesthepricemovementofAOLCorporation stockoverthelast5years.Thesecondcolumngivestheperiodsconsumerpriceindex. Calculatetherealvalueofthestockforeachtimeperiodusingyear5asthebaseyear.Ifyou purchased$1,000worthofAOLCorporationinyear1,whathashappenedtothepurchasing powerofyouroriginal$1,000investmentwhenyousellthestockinyear5? Year 1996 1997 1998 1999 2000 Answer: AOL $4.00 $3.84 $7.00 $37.00 $70.00 CPI 147.8 155.3 163.0 165.4 172.1 RealAOLStockPrice in2000Dollars $4.66 $4.26 $7.39 $38.50 $70.00

Year 1996 1997 1998 1999 2000

Therealvalueofayear1996dollarin2000is 172.1($1)/147.8 =$1.16.Iwouldhave bought250sharesofAOLat1996prices(ignoringtransactioncosts)withthe$1,000. Thevalueofthestockintheyear2000is (250($70)) =$17,500.Thechangeinmy purchasingpoweris($17,500- $1,160)/$1,160 =14.09. Thatis,mypurchasingpower frominvestinginthestockrisesby1,409%.
Diff:2 Section: 1.3

64) ThefollowingisalistofhousingcostsinfivedifferentcountriesalongwiththeirCPI.For whichcountryistherealcostofhousingdeclining?Useyear2asthebaseyearinyour answer.

Answer: TherealcostofhousinginSpainhasdecreased.Therealcostofyear1housinginyear 2is(169/143)53 =$62.64.Thisexceedstherealcostofyear2housinginyear2,$57.00. Thus,housingcostshavedeclinedinSpain.

Diff:1 Section: 1.3

14

65) ForeachcityacrosstheU.S.,economistsconstructapriceindexforasimilarbasketofgoods. InLosAngelestheindexis127.3andtheindexforDallasis94.8.Ifyouhavebeenoffered $137,000forajobinLosAngelesand$117,000forasimilarjobinDallas,whichjobaffordsyou thehighestpurchasingpowerofthebundleofgoodsinthepriceindex?UsetheLosAngeles valueasthebase. Answer: Realvalue[Dallas]=127.3($117,000)/94.8 = $157,111.Thisexceedsthereal$137,000 salaryforthejobinLosAngeles.TheDallasjobprovideshigherpurchasingpower.
Diff:2 Section: 1.3

15