Refer to Table 19-23. Suppose that a very simple economy produces ...

[c0205847]

Refer to Table 19-23. Suppose that a very simple economy produces three goods: pizzas, haircuts, and backpacks. Suppose the quantities produced and their corresponding prices for 2011 and 2016 are shown in the table above.
 
  Use the information to compute real GDP in the year 2011 and 2016. Assume that 2011 is the base year. Is output higher in 2016 or 2011? Why?

Question 2

Many book publishers use cost-plus pricing to establish prices for some of their books.
 
  Would you expect a publishing company to use a strict cost-plus pricing system for all its books? How might you determine if a publishing company actually does use cost-plus pricing for all its books?

[cici]

Answer to Question 1

Recall that real GDP is found by valuing GDP in a particular year using base year prices. Since 2011 is the base year, real GDP for 2011 is found by multiplying 2011 prices by 2011 quantities and then adding the values up. The individual values for 2011 are calculated in the following table:

Product Quantity Price Value
Pizzas 100 10 1,000
Haircuts 50 15 750
Backpacks 200 40 8,000

Therefore, Real GDP for 2011 =
Quantity of pizza in 2011  price of pizza in 2011 = 1,000
Quantity of haircuts in 2011  price of haircuts in 2011 = 750
Quantity of backpacks in 2011  price of backpacks in 2011 = 8,000
Total 9,750.

The individual values for 2016 output and prices in 2011 are calculated in the following table:

Product Quantity Price Value
Pizzas 120 10 1,200
Haircuts 45 15 675
Backpacks 210 40 8,400

Therefore, Real GDP for 2016 =
Quantity of pizza in 2016  price of pizza in 2011 = 1,200
Quantity of haircuts in 2016  price of haircuts in 2011 = 675
Quantity of backpacks in 2016  price of backpacks in 2011 = 8,400
Total 10,275.

Since real GDP is a measure of output, and real GDP is higher in 2016 as compared to 2011, output has increased.

Answer to Question 2

We should not expect a publishing company to use cost-plus pricing for all its books. We can see evidence that cost-plus pricing is not always used by looking at prices of the same book in different markets (for example, the United States and European markets), or by noting that best sellers usually sell for lower prices, or that the relative prices of some books change over time.

[c0205847]

Correct answers!

[cici]

Great! Please up vote