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UW-Madison ECON 102 - Economics 102 Answers to Homework 3

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Economics 102Summer 2011Answers to Homework #3Due 6/30/11Directions: The homework will be collected in a box before the lecture. Please placeyour name, TA name and section number on top of the homework (legibly). Make sureyou write your name as it appears on your ID so that you can receive the correct grade.Please remember the section number for the section you are registered, because you willneed that number when you submit exams and homework. Late homework will not beaccepted so make plans ahead of time. Please show your work. Good luck!1. Suppose there are 50,000 people 16 years old or older in Cedarburg. Of this 50,000 people:- 4,000 are currently looking for work;- 6,000 are currently employed part-time but wanting to work full-time; - 10,000 are working full-time;- 2,000 are discouraged workers; and - 5,000 are either in school, the military, or institutionalized.a. What is the current unemployment rate in Cedarburg?The unemployment rate is equal to [(the number of unemployed)/(the number of unemployed + the number of employed)]*100= [4000/(4000 + 16,000)]*100 = 20%.b. What is the unemployment rate if Cedarburg classifies discouraged workers as unemployed workers?The number of unemployed workers changes to 6000. Thus, the unemployment rate is equal to [(6000)/(6000 + 16000)] * 100 = 27.3%.c. What is the unemployment rate if Cedarburg classifies discouraged workers and part-time workers wanting to work full-time as unemployed workers?The number of unemployed workers changes to 12000. Thus, the unemployment rate is equal to [(12000)/(12000 + 10000)] * 100 = 54.5%.d. Does the way we defined who is unemployed matter? Explain your answer.How we define unemployment matters when calculating the unemployment rate. As noted in parts (a), (b), and (c) you get quite different measures of the unemploymentrate depending on how you classify a person who is either not working or not working as much as they would like. Our current definition of unemployment resultsin a lower measure of unemployment than would occur if we counted discouraged workers or part-time workers who would like to work full-time as unemployed workers. 12. Suppose that a community has 40,000 people in the civilian labor force. Of these 40,000 people 4,000 are currently structurally unemployed while 2,000 are currently frictionally unemployed. There are in addition 1,000 people who are cyclically unemployed. a. What is the unemployment rate in this community given the above information?The unemployment rate is equal to [7,000/40,000]* 100 = 17.5 %.b. What is the cyclical unemployment rate in this community given the above information? The cyclical unemployment rate is equal to [1000/40,000] * 100 = 2.5%.c. What is the natural unemployment rate in this community given the above information?The natural rate of unemployment rate is equal to [(the structurally unemployed + the frictionally unemployed)/(civilian labor force)] * 100 = [(4000 + 2000)/40,000] * 100 = 15%. d. How do you know that this community is currently in a recession?The economy is in a recession because there is a positive amount of cyclical unemployment. When there is positive cyclical unemployment it signifies that the labor market is not providing employment to some workers due to the economy not producing at its full potential. 3. The St. Louis Federal Reserve District Bank collects an abundance of information. Go to http://research.stlouisfed.org/fred2/categories/10 and “click on” Household Survey Data to find two different series on unemployment data. The first series is labeled “UNRATE” and is the Civilian Unemployment Rate. The second series of interest for this question is labeled “U6RATE” and is the Total Unemployed plus all marginally attached workers plus total employed part-time for economic reasons. Examine this data for the period 2007 to 2011 in order to answer this series of questions. a. Prior to the recession of 2007 what was the unemployment rate reported in this data for the two different measures? Were the two values very different?According to the general unemployment rate data, the unemployment rate before the beginning of the recession in 2007 was approximately 4.5%. The U6RATE indicated an unemployment rate of around 8%.b. In this data set it is possible to have the data represented as the annual percentagechange in unemployment. When you look at the two sets of unemployment data as annual percentage changes are the two sets of data growing at similar rates during 2the course of the recession? Explain your answer. If the rates are different how do you interpret this difference?Over the course of the recession the UNRATE is growing from about ½% a year at the beginning of the recession to around 4% at the height of the recession. The U6RATE is growing at about 1% at the beginning of the recession to around 6.75% at the height of the recession. The two rates of unemployment are not growing at thesame rate. This indicates that more and more workers are joining the marginally attached or discouraged worker pool. 4. Suppose that the market basket for purposes of computing the consumer price index in Winston contains 10 steaks, 20 potatoes, 5 cookies, and 2 bags of charcoal. You are given the following price data for the years 2005 through 2010 in Winston. Item Price in 2005Price in 2006Price in 2007Price in 2008Price in 2009Price in 20101 Steak $4.00 $5.00 $4.00 $6.00 $5.00 $7.001 Potato $.50 $.60 $.60 $.40 $.50 $.801 Cookie $1.00 $1.00 $2.00 $2.00 $1.00 $2.001 Bag of Charcoal$5.00 $5.00 $5.00 $6.00 $7.00 $5.00a. Using the above data compute the cost of each market basket. Put your answers in the following table.Cost of Market Basket in 2005Cost of Market Basket in 2006Cost of Market Basket in 2007Cost of Market Basket in 2008Coat of Market Basket in 2009Cost of Market Basket in 2010Answer:Cost of Market Basket in 2005 (10)(4) + (20)(.5) + (5)(1) + (2)(5) = $65Cost of Market Basket in 2006 (10)(5) + (20)(.6) + (5)(1) + (2)(5) = $77Cost of Market Basket in 2007 (10)(4) + (20)(.6) + (5)(2) + (2)(5) = $72Cost of Market Basket in 2008 (10)(6) + (20)(.4) + (5)(2) + (2)(6) = $90Coat of Market Basket in 2009 (10)(5) + (20)(.5) + (5)(1) + (2)(7) = $79Cost of Market Basket in 2010 (10)(7) + (20)(.8) + (5)(2) + (2)(5) = $106b. Now, calculate the CPI for 2005 through 2010 using 2005 as the base year. Enter your results in the following table. Use a 100 point scale for the CPI. Carry your answer out to two places past the


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UW-Madison ECON 102 - Economics 102 Answers to Homework 3

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