Question

A labor contract provides for a first-year wage of $15 per hour, and specifies that the real wage will rise by 2 percent in the second year of the contract and by another 2 percent in the third year. The CPI is 1.00 in the first year, 1.09 in the second year, and 1.15 in the third year. What dollar wage must be paid in the third year

Answer 1

Answer:

$17.9469

Explanation:

Calculation for what dollar wage must be paid in the third year

Since the first year is tend to be the base year in which the real wage and nominal wage are both $15 per hour in that year.

The real wage is suppose to increase by 2 percent in the second year which means that the real wage in year two will be $15.30 ($15 * 1.02) per hour.

In a situation where the real wage was supposed to also increase by 2 percent in the third year, this means that the real wage in year three will be $15.606 ($15.3 * 1.02) per hour.

Therefore In order for us to find the nominal wage in third year , we have to index the real wage in order for it to adjust for inflation. Thus the nominal wage in third year will be $17.9469($15.606 * 1.15).

Therefore what dollar wage must be paid in the third year will be $17.9469