Question

In: Economics

Workers and managers in the XYZ Company have negotiated a wage agreement under the expectation that...

Workers and managers in the XYZ Company have negotiated a wage agreement under the expectation that the inflation rate will be zero over the period of the contract. In order to protect workers against unpredictable inflation, however, the contract states that at the end of each year, the wage rate will increase by the same percentage as the increase in the consumer price index (CPI). At the beginning of the contract, the CPI is 428 and the wage rate is set at $12.00 an hour. At the end of the first year the CPI is 450, and at the end of the second year the CPI is 468. What will the new wage rate become at the end of the first year? The second year?

Solutions

Expert Solution

Increase in CPI at the end of the first year = [(450-428)/428]*100 = (22/428)*100 = 5.14%
So, new wage at the end of first year = 12 + (5.14%)*(12) = 12 + 0.6168 = $12.62

Increase in CPI at the end of the second year = [(468-450)/450]*100 = (18/450)*100 = 4%
So, new wage at the end of first year = 12.62 + (4%)*(12.62) = 12.62 + 0.5048 = $13.12

Rahul Sunny answered 2 years ago
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