Author Question: In 1979, the price of gasoline was 1.389 per gallon and the CPI was 72.6. In 2003, the price of ... (Read 136 times)

K@ · **on:** Jun 29, 2018

In 1979, the price of gasoline was 1.389 per gallon and the CPI was 72.6. In 2003, the price of gasoline was 1.589 per gallon and the CPI was 182.9. Find the real price of gasoline in 1979 and 2003 in terms of base period dollars.

What will be an ideal response?

Question 2

Which of the following is an example of adverse selection?

A) Overgrazing of a common piece of land
B) Passengers travelling in a subway without a ticket
C) A customer buying a defective appliance from a used goods market
D) The generation of a harmful chemical during the production of a good

ryansturges · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

To adjust the price in 1979, the ratio of the CPI in the base period to the CPI in 1979 is needed. The base period CPI is 100, so this ratio is (100 )/(72.6 ) = 1.38. Then multiply the 1979 price by this ratio to convert the price to base period dollars, which yields a base period price for the gallon of gasoline of (1.389 per gallon 1.38 ) = 1.92 per gallon.
To adjust the price in 2003, a similar procedure is followed. The ratio of the CPI in the base period to the CPI in 2003 is (100 )/(182.9 ) = 0.55. Then multiply the 2003 price by this ratio to covert the price to base period dollars, which yields a base period price for the gallon of gasoline of (1.589 per gallon 0.55 ) = 0.87 per gallon.

Answer to Question 2

C