Question

Mark's wage contract specifies a $50,000 salary for the first year, and specifies a salary increase equal to the percentage increase in the CPI during the second year. The increase in the CPI during the year was 4.0%. If the CPI overstates inflation by 1.0% (that is, the actual price increase was 3% and not 4%), at the end of the first year Mark's salary increased by $________ more than it would have without the upward bias.

Answer 1

Answer:

$500

Explanation:

Data provided in the question

Salary for the first year = $50,000

CPI increase during the year = 4%

Overstated inflation = 1% i.e 5%

The computation of the increased in salary is shown below:

= Salary of the first year × inflation rate - salary of the first year × CPI increase during the year

= $50,000 × 5% - $50,000 × 4%

= $2,500 - $2,000

= $500