Refer to Table 9-13. Consider a simple economy that produces only ...

[clmills979]

Refer to Table 9-13. Consider a simple economy that produces only three products: tacos, earplugs, and toothbrushes. Use the information in the table to calculate the inflation rate for 2016, as measured by the consumer price index.
 
  What will be an ideal response?

Question 2

XYZ Corporation operates in a perfectly competitive market and is currently maximizing profit. To keep the firm's costs low, XYZ's managers have decided to dump waste in a nearby river.
 
  Explain why the level of output currently produced by XYZ is not efficient.

[phuda]

Answer to Question 1

Total expenditures for 2001 = (5  1.50 ) + (10  6.00 ) + (3  2.50 ) = 75.00.
Total expenditures for 2015 = (5  2.00 ) + (10  7.50 ) + (3  3.50 ) = 95.50.
Total expenditures for 2016 = (5  2.25 ) + (10  7.00 ) + (3  3.50 ) = 91.75.

The CPI for 2015= (95.50/75.00 )  100 = 127.33
The CPI for 2016 = (91.75/75.00 )  100 =122.33.
So, the inflation rate for 2016 = ((122.33  127.33 )/127.33 )  100 ) = 3.9.

Answer to Question 2

Dumping in the river creates a negative externality. Thus, there is a cost involved in the production by XYZ that is being borne by third parties. If the firm is maximizing profit and producing where price is equal to the firm's marginal costs, the firm will produce a level of output for which the true cost (private + external cost) is greater than the price. This means that the level is output is greater than the efficient level of output.