Please write all answers neatly and legibly.
Question 1. Suppose that the market basket underlying the CPI in Elyria is composed of 3 bicycles, 10 pizzas, and 5 gallons of milk. You are given the following information about prices of these items over the three year period 2007-2010.
2007 2008 2009
Price of a Bicycle $100 $120 $150
Price of a Pizza $4 $5 $5
Price per gallon of milk $2 $2 $5
a. Given this information calculate the CPI on a 100 point scale for 2007, 2008, and 2009 using 2007 as the base year. Show all your work in a logical, organized manner. Put your index numbers in the following table after you do your calculations (you must show the steps you took to get the index numbers in order to get full credit on this question).
Year CPI
2007
2008
2009
b. Calculate the annual rate of inflation between 2007 and 2008, and the annual rate of inflation between 2008-2009. Show any formula and the work you did to get this inflation rate. After computing your answers put them in the following table (you must show the steps you took to get the rate of inflation in order to get full credit on this question).
Period Rate of Inflation
2007-2008
2008-2009
Question 2. (Circle the correct response) Joe runs an engine repair shop and he has recently decided to raise the price for his services. Upon increasing the price of his service he finds that his total revenue from the business increases. Holding everything else constant, this implies that the demand for his services is
a. Inelastic
b. Elastic
Question 3. (Circle the correct response) Mary finds that when the price of Coke increases she purchases more Pepsi. Holding everything else constant this implies that Mary’s
a. Cross price elasticity of demand of Coke for Pepsi is a positive number.
b. Income elasticity of demand for Coke is a negative number.
Question 4. Suppose Clint’s income is $100 a day and he spends all of this income on hamburgers (H) or hotdogs (D). If Clint spends all of his income on hamburgers he finds that he can purchase 20 hamburgers and if he spends all of his income on hotdogs he finds that he can purchase twice as many hotdogs as the maximum number of hamburgers he can afford.
a. Write an equation in slope intercept form for Clint’s budget line given this information and measuring hamburgers on the vertical axis.
b. Draw a diagram of Clint’s budget line in the space below measuring hamburgers on the vertical axis and hotdogs on the horizontal axis. Label all intercept points, axes, and the budget line in your graph to get full credit for this question.