Business & Finance HOMEWORK

ECO 204 NU: Homework 1** : (45 points total)

All calculations must round up to the nearest hundredth decimal.

For example, 563. 7289 = 563. 73, and 563.7211 = 563.72.

1. According to economics, people make decisions at the margin. What does it mean to make decisions at the margin, and why do economists claim it helps us make efficient choices? (3 points)

2. In economics, time is considered scarce. Yet some say we fit work, study, meals, relaxation, and other tasks into each day. Is time truly scarce? Explain your answer with reasoning and examples. (3 points)

3. Country X produces two goods: food and guns. The PPF below illustrates the combinations of food and guns that Country X can produce, given all its available resources. (12 points)

a. In terms of efficient use of resources, is point G an efficient choice? Why or why not? (3 points)

b. In terms of efficient use of resources explain the movement from point G to D. Is country X making a trad-off between food and guns? Is choice D efficient? Briefly explain. (4 points)

 

c. In terms of efficient use of resources explain the movement from point D to C. Is country X making a trad-off between food and guns? Is choice C efficient? Briefly explain (2 points)

 

 

d. Is country X’s choice at point A, 1,000 tons of food, efficient? Briefly explain. (3 points)

4. Real – Vs. – Nominal GDP

The economy of country X produces three goods: computers, DVDs, and pizza. The accompanying table shows the prices and output of the three goods for the years 1, 2, and 3.

(8 points)

Year	1 Base Year	2	3
	Price	Quantity	Price	Quantity	Price	Quantity
Calculators	$70	10	$75	11	$83	12
DVDs	$10	100	$12	105	$14	110
Pizzas	$16	20	$17	20	$19	30
Total Nominal GDP	$.................	$.................	$...............
Total Real GDP	$.................	$.................	$................

a. Calculate Nominal GDP for each year. (2 points)

b. Calculate Real GDP for each year. (2 points)

c. If Real GDP in year 2023 = $17,900,000 and in year 2024 = $16,100,000 calculate percentage growth rate in Real GDP between the given years? (2 points)

d. Real and nominal GDP in 2024 were $23,400.000 and $29,375,000, respectively. Calculate the GDP deflator for 2024. What does this value mean? (2 points)

5. Consumer Price Index (CPI), and Inflation

Use the data in the accompanying table to answer questions a, and b. (9 points)

	2022 Base year	2023	2024
115 Loaves of bread	$2.40	$3.80	$4.50
60 sticks of butter	$5.00	$5.60	$5.90

a. Using 2020 as a base year, calculate the CPIs for bread and butter for each year. (6 points)

2022: CPI ______________

2023: CPI ______________

2024: CPI ______________

b. Suppose Consumer Price Index (CPI) for the year 2024 was 313.69, and increased to 319.80 in year 2025, determine the inflation rate over this period. (3 points)

6. Which of the following transactions will be included in GDP for the United States? Briefly explain. (4 points)

a. A California winery produces a bottle of Chardonnay and sells it to a customer in

Montreal, Canada.

b. A book publisher produces too many copies of a new book; the books don’t sell

this year, so the publisher adds the surplus books to inventories.

7. Converting nominal income to real income . (6 points)

In year 1, your nominal income was $59,800 when the CPI was 102.5 (base year = 100). In year 2, your nominal income increased by $4,000, while the CPI rose to 109.8.

a) Calculate your real income for both years.

b) Has your increase in real income kept pace with inflation? Briefly explain

c) If not, what should your nominal income in year 2 have been to maintain the same real purchasing power as in year 1?

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