Understanding Consumer Price Index (CPI) and Cost of Living Index

What is Consumer Price Index (CPI)?

1.The consumer price index for the current year measures the cost of a standard basket in the _____ year relative to the cost of the same basket in the _____ year.

a)current; base

b)current; current

c)base; index

d)base; current

2.Suppose that the total expenditures for a typical household in 2000 equaled $4,000 per month, while the cost of purchasing exactly the same items in 2005 was $4,500. If 2000 is the base year, the CPI for 2000 equals: 

a)0.83

b)1.00

c)1.20

d)1.25

3.The typical family on the Planet Econ consumes 10 pizzas, 7 pairs of jeans, and 20 liters of milk. In 2004 pizzas cost $10 each, jeans cost $40 per pair, and milk cost $3 per liter. In 2005, the price of pizzas went down to $8 each, while the price of jeans and milk remained the same. Between 2004 and 2005, a typical family's cost of living:

a)increased by 4.5 percent.

b)decreased by 4.5 percent.

c)remained the same.

d)decreased by 20 percent.

4.If the Consumer Price Index increased from 1.52 to 1.65, then it must be the case that _____ relative to prices in the base year. 

a)all prices rose

b)the weighted average level of prices rose

c)all prices fell

d)some prices rose and some prices fell

5.A consumer expenditure survey reports the following information on consumer protein spending:

Using 2005 as the base year, by how much does a "cost of protein" index increase between 2005 and 2006?  

a)5.2% 

b)8.6% 

c)15.7% 

d)14.3%

6.A consumer expenditure survey reports the following information on entertainment spending:

Using 2005 as the base year, by how much does a "cost of entertainment" index increase between 2005 and 2006?  

a)13.75% 

b)8.65% 

c)13.43% 

d)34.92%

7.Which of the following is a real quantity?

a)the current wages paid to factory workers

b)the cost of a new car

c)the number of tons of steel produced in 2005

d)the current price of a barrel of oil

8.A factory worker earned $12 an hour in 1980. The CPI was 0.82 in 1980. The same factory worker was earning $15 an hour in 1990 when the CPI was 1.40. From 1980 to 1990, the factory worker's hourly real wage:  

a)increased from $8.57 to $18.29. 

b)decreased from $14.63 to $10.71. 

c)remained constant. 

d)increased from $12 to $15.

How would each of the following likely affect the real wage and employment of unskilled workers on an automobile plant assembly line? Justify your answer. 

a)Demand for the type of car made by the plant increases.

b)A sharp increase in the price of gasoline causes many commuters to switch to public transportation.

c)Because of alternative opportunities, people become less willing to do factory work.

d)The plant management introduces new assembly-line methods that increase the number of cars unskilled workers can produce per hour while reducing defects.

e)Robots are introduced to do most basic assembly-line tasks.

a)Production data for Badr’s Bicycle Factory are as follows:

Other than wages, Badr has costs of $200 (for parts and so on) for each bike assembled.

Bikes sell for $40 each. Find the marginal product and the value of the marginal product for each worker (don’t forget about Badr’s cost of parts).

b)The following table provides information about production at the XYZ-TV Company.

How many workers will the XYZ-TV Company hire if the going wage for TV production workers is $16,000?  Show your calculation in detail.

a)Define nominal quantity and real quantity.

Assume that the cost of basket of goods and services in the year 2010 as a base year was $1600. In 2018, it increased to $2400. Calculate the consumer price index in 2018. Interpret your answer.