Econ Hw 1

1. The following table shows the average retail price of salted grade AA butter per pound and the Consumer Price Index from 1980 to 2000, scaled so that the CPI = 100 in 1980. | 1980 | 1985 | 1990 | 1995 | 2000 | Consumer Price Index | 100.00 | 130.58 | 158.56 | 184.95 | 208.98 | Retail Price of Butter | $1.88 | $2.12 | $1.99 | $1.61 | $2.52 |

a. Calculate the real price of butter in 1980 dollars.
Recall: Real Price of butter in Year t=CPI1980CPIt×Nominal Price in Year t
For Example: Real Price of butter in 1995=100.00184.95×1.61=$0.87

| 1980 | 1985 | 1990 | 1995 | 2000 | Real Price of Butter | 100/100*(1.88) =1.88 | 100/130.58*(2.12) =1.62 | 100/158.56*(1.99)=1.26 | 0.87 | 100/208.98*(2..52)=1.21 |

b. Has the real price increased/decreased/stayed the same since 1980?
The real price has decreased since 1980 till 1995, it increased a little in 2000 but it is still less than 1980. So the real price has decreased since 1980.

c. What is the percentage change in the real price (1980 dollars) from 1980 to 2000?
(1.21-1.88)/1.88
= -35.64%
2. Suppose the demand curve for a product is given by Q = 300 – 2P + 4I, where I is average income measured in thousands of dollars. The supply curve is Q = 3P – 50.

a. If I=25, find the market clearing price and quantity for the product.
QS=QD 300-2P+4I=3P-50
300-2P+4(25)=3P-50
450=5P ______
P=90, Q=220 __________________________________________________________________
b. If I=50, find the market clearing price and quantity for the product.
QS=QD 300-2P+4I=3P-50
300-2P+4(50)=3P-50 ____________________________________________________________
=550=5P P=110, Q=280

3. Consider a competitive market for which the quantities demanded and supplied (per year) at various prices are given as follows:

Price (Dollars) | Demand (Millions) | Supply (Millions) | 60 | 22 | 14 |