Test Bank to Accompany

Microeconomics
Seventh Edition

by

Pindyck / Rubinfeld

Pearson Education

2009
8/12/2008
Contents
Chapter1 Preliminaries ........................................................................................................................1
Chapter2 TheBasicsofSupplyandDemand..................................................................................16
Chapter3 ConsumerBehavior...........................................................................................................55
Chapter4 IndividualandMarketDemand...................................................................................125
Chapter5 UncertaintyandConsumerBehavior ...........................................................................179
Chapter6 Production ........................................................................................................................236
Chapter7 TheCostofProduction ...................................................................................................273
Chapter8 ProfitMaximizationandCompetitiveSupply ............................................................327
Chapter9 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

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

2
 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.
C) Iisincorrect,IIiscorrect. D) BothIandIIarecorrect.
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

3
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.
C) IisfalseandIIistrue. D) IandIIarefalse.
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

4
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

5
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

6
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

7
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.
C) IIistrueandIisfalse. D) IandIIarefalse.
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

8
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

9
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 C) 47.9 D) 209.0
Answer: C
Diff:1
Section: 1.3

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: Thechangeinthegeneralpricelevelis100(163-130.7)/130.7= 25%.Thus,thelevelof
paymentsin1998needtobeP(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 AOL CPI

1996 $4.00 147.8
1997 $3.84 155.3
1998 $7.00 163.0
1999 $37.00 165.4
2000 $70.00 172.1

Answer: RealAOLStockPrice
Year
in2000Dollars
1996 $4.66
1997 $4.26
1998 $7.39
1999 $38.50
2000 $70.00

Therealvalueofayear1996dollarin2000is172.1($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