A one-pound bag of Oreos cost $0.32 in 1922 and $2.99 in 2016. Which one-pound bag...

A one-pound bag of Oreos cost $0.32 in 1922 and $2.99 in 2016. Which one-pound bag of Oreos is cheaper in real terms? Explain how you would go about determining your response and show your work.

Expert Solution

To identify which bag of Oreas is cheaper in real terms, we need to know the price level (CPI) for both the years.

Real price in 2016 = (Nominal price in 2016 / Price level (CPI) in 2016) = $2.99 / Price level (CPI) in 2016

Real price in 1922 = (Nominal price in 1922 / Price level (CPI) in 1922) = $0.32 / Price level (CPI) in 1922

Real price in 2016 / Real price in 1922 = ($2.99 / Price level (CPI) in 2016) / ($0.32 / Price level (CPI) in 1922)

Real price in 2016 / Real price in 1922 = 9.34 x [(Price level (CPI) in 1922) / (Price level (CPI) in 2016)]

Therefore,

If {9.34 x [(Price level (CPI) in 1922) / (Price level (CPI) in 2016)]} > 1, Real price in 2016 > Real price in 1922. Or,

If {9.34 x [(Price level (CPI) in 1922) > (Price level (CPI) in 2016)]}, Real price in 2016 > Real price in 1922, that is,

If {9.34 x [(Price level (CPI) in 1922) > (Price level (CPI) in 2016)]}, Oreos are cheaper (costlier) in 1922 (2016).

On the other hand,

If {9.34 x [(Price level (CPI) in 1922) / (Price level (CPI) in 2016)]} < 1, Real price in 2016 < Real price in 1922. Or,

If {9.34 x [(Price level (CPI) in 1922) < (Price level (CPI) in 2016)]}, Real price in 2016 < Real price in 1922, that is,

If {9.34 x [(Price level (CPI) in 1922) < (Price level (CPI) in 2016)]}, Oreos are cheaper (costlier) in 2016 (1922).

Rahul Sunny answered 2 years ago

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