Question

In: Economics

A labor contract provides a first year (nominal) wage of $50,000 per year, and specifies that...

A labor contract provides a first year (nominal) wage of $50,000 per year, and specifies that the real wage will increase by 4% each year. The CPI is 2.0 in the first year, 2.1 in the second year, and 2.15 in the third year.

Please enter your answers as numeric responses rounded to the nearest dollar (ie. 32,900 or $32,900 not 32,900.00 or "Thirty-two thousand nine hundred dollars").

What is the real wage for the first year of this contract?

What is the real wage for the second year of this contract?

What is the real wage for the third year of this contract?

What is the nominal wage for the second year of this contract?

What is the nominal wage for the third year of this contract?

Solutions

Expert Solution

(1) Real wage = (Nominal wage / CPI)

=> Real wage in first year = (Nominal wage in first year / CPI in the first year)

=> Real wage in first year = ($50,000 / 2)

=> Real wage in first year = $25,000

-------------

(2)

the real wage will increase by 4% each year.

Real wage in second year = Real wage in first year *(1 + 0.04)

=> Real wage in second year = $25,000 *(1.04)

=> Real wage is second year = $26,000

-------------------

(3) Real wage increase by 4% each year

=> Real wage in third year = Real wage in second year (1+0.04)

=> Real wage in third year = $26,000 (1+0.04)

=> Real wage in third year = $27,040

---------------------

(4) Nominal wage = Real wage * CPI

=> Nominal wage in second year = Real wage in second year * CPI in second year

=> Nominal wage in second year = $26,000 * 2.1

=> Nominal wage in second year = $54,600

-------------------------

(5)

Nominal wage = Real wage * CPI

=> Nominal wage in third year = Real wage in third year * CPI in third year

=> Nominal wage in third year = $27,040 * 2.15

=> Nominal wage in third year = $58,136

Rahul Sunny answered 2 years ago
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