Suppose that the price of a textbook was $150 in 2000 and is now $220 in 2016. S

Question

Suppose that the price of a textbook was $150 in 2000 and is now $220 in 2016. Suppose further that the CPI in 2000 was 100 and the CPI today in 2016 is 110. What is the real price of the 2016 textbook in 2000 dollars? Show your work. Has the real price of this textbook increased or decreased between 2000 and 2016? Clearly specify your conclusion and indicate which specific numbers that you are comparing for full credit. Now suppose that textbooks cost S180 in 2016 anywhere that you purchase them in the country. Suppose that the 2016 CPI is 125 in New York City but only 105 in Fort Collins. What is the real price of a textbook purchased in New York City in 2016 expressed in Fort Collins terms? Show your work. Is the real price of this textbook higher or lower in Fort Collins? Clearly specify your conclusion and indicate which specific numbers that you are comparing for full credit.

Explanation / Answer

a. Real Price of 2016 textbook = Nominal Price*CPI of 2000/CPI of 2016

= 220*100/110

= $200

b. Price of textbook has increased as price of textbook in 2000 was $150 and Real Price of 2016 textbook in 2000 dollars is 200.

So, Price of textbook is increased by 200 - 150 = $50 in 2000 dollars terms.

c.. Real Price of 2016 in fort collins term = price of textbook*CPI in Fort Collins/CPI inNEW York

= 180*(105/125)

= 151.2

d. Reaal Price of Text bok is higher in Fort collins because the price of textbook is $180 in Fort Collins whereas price of textbook purchassed in new york in 2016 expressed in fort collins terms is 151.2.

So, REal price of Textbook in Fort colllins is higher by 180 - 151.2 = 28.8 in fort collins terms.

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