Suppose that people consume only three goods, as shown in this table: (5 Marks)
Tennis Balls
Tennis Racquets
Gatorade
1998 price $2
$40
$1
1998 quantity 100
10
200
1999 price $2
$60
$2
1999 quantity 100
10
200
What is the percentage change in the price of each of the three goods?
What is the percentage change in the overall price level?
Do tennis racquets become more or less expensive relative to Gatorade?
Does the well-being of some people change relative to the well-being of others? Explain.
Again, take a shot. If you know how to calculate the CPI (from your previous post), you will have no trouble with this one.
where is the answer?
To calculate the percentage change in the price of each of the three goods, we can use the formula:
Percentage change in price = [(new price - old price) / old price] * 100
For Tennis Balls:
[(2 - 2) / 2] * 100 = 0% change in price
For Tennis Racquets:
[(60 - 40) / 40] * 100 = 50% increase in price
For Gatorade:
[(2 - 1) / 1] * 100 = 100% increase in price
To calculate the percentage change in the overall price level, we can use the formula:
Percentage change in overall price level = [(CPI in new year - CPI in old year) / CPI in old year] * 100
Since we don't have the CPI values, we can't calculate the exact percentage change in the overall price level.
Based on the given information, Tennis Racquets become more expensive relative to Gatorade. The price of Tennis Racquets increased by 50% while the price of Gatorade increased by 100%.
The well-being of some people may change relative to others based on their preferences and budgets. If someone values Tennis Racquets more than Gatorade, they may feel worse off due to the price increase. On the other hand, if someone values Gatorade more than Tennis Racquets, they may feel relatively better off as the price of Gatorade increased less than the price of Tennis Racquets. Factors such as income, personal preferences, and substitution possibilities can affect individual well-being in this scenario.
To calculate the percentage change in price for each of the three goods, you can use the following formula:
Percentage change in price = [(New price - Old price) / Old price] * 100
For Tennis Balls:
Percentage change in price = [($2 - $2) / $2] * 100 = 0%
For Tennis Racquets:
Percentage change in price = [($60 - $40) / $40] * 100 = 50%
For Gatorade:
Percentage change in price = [($2 - $1) / $1] * 100 = 100%
To calculate the percentage change in the overall price level, you can use the Consumer Price Index (CPI). The CPI is a measure of the average change in prices over time for a fixed basket of goods and services.
The formula for calculating the CPI is:
CPI = (New cost of basket / Old cost of basket) * 100
For 1998:
Cost of basket = (Price of Tennis Balls * Quantity of Tennis Balls) + (Price of Tennis Racquets * Quantity of Tennis Racquets) + (Price of Gatorade * Quantity of Gatorade)
Cost of basket = ($2 * 100) + ($40 * 10) + ($1 * 200) = $2,000 + $400 + $200 = $2,600
For 1999:
Cost of basket = (Price of Tennis Balls * Quantity of Tennis Balls) + (Price of Tennis Racquets * Quantity of Tennis Racquets) + (Price of Gatorade * Quantity of Gatorade)
Cost of basket = ($2 * 100) + ($60 * 10) + ($2 * 200) = $2,000 + $600 + $400 = $3,000
Using these values, we can calculate the percentage change in the overall price level:
Percentage change in overall price level = [(New CPI - Old CPI) / Old CPI] * 100
Percentage change in overall price level = [(3,000 - 2,600) / 2,600] * 100 = 15.38%
Based on the percentage change in price, Tennis Racquets became more expensive relative to Gatorade. The price of Tennis Racquets increased by 50% while the price of Gatorade increased by 100%.
Regarding the well-being of some people relative to others, it is important to note that changes in the price level affect people differently depending on their consumption patterns. If an individual consumes more of the goods that experienced greater price increases, their well-being may be negatively affected. Conversely, if an individual consumes more of the goods that experienced smaller price increases or remained unchanged, their well-being may be relatively better off. It ultimately depends on each individual's consumption choices and preferences.
A. The percentage change in prices are
0 for Tennis Balls, 50% for Tennis Racquets and 100% for Gatorade.
B. At first glance, the tennis Racquet is still more expensive compared to Gatorade. You need to pay $60 for a racquet, but you get 200 Gatorade only for $2. Gatorade is complement goods, you drink it after tennis. So an increase in racguet price will cause a demand for racguet and Gatorade to decrease. In theory, an increase of Gatorade price of 100% will make people play less tennis. It could have efects on their health