Question 1: CPI/Inflation
You have the following information about the economy for Little Italy
Year Price of Spaghetti Price of Meatball Price of Cannoli
2005 $4 $1 $2
2006 $6 $1 $2
2007 $6 $2 $2
The market basket of goods in Little Italy is one Italian dinner. The Italian dinner is comprised of:
1 order of Spaghetti, 2 Meatballs and 1 Cannoli (This is the market basket)
Using any base year you would like, calculate the inflation rate between 2006 and 2007. (Hint: the inflation rate is the same no matter what base year you use.)
Question 2: Elasticity
You have the following information about Steak and Lobster.
Quantity of Steak Quantity of Lobster Price of Lobster
100 100 $20
75 80 $25
1. Find the cross price elasticity of demand for steak, using the arc-elasticity formula.
2. Are steak and lobster substitutes, complements or neither? (Circle your answer)
a. Substitutes
b. Complements
c. Neither
d. Not enough information
Question 3: Utility and Preferences
You know the following information about an individual and their preferences between X and Y, and information about the market for goods X and Y.
MRSXY = -3Y/X
Price of X = $6
Price of Y = $1
Individual's income = $240
a. Write down the equation for the individual’s budget constraint. Be specific.
b. Determine the optimal combination of good X and Y that the individual buys.