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From Table 2.1, calculate: i. co-efficient of income. ii. what type of goods is garri to Mr. Adebowale

Economics

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Answers

2 parts
a(i)

272.73\text{272.73}

a(ii)

217.39\text{217.39}

Step-by-step solution

7 steps

here's the solution for Question 1:

Part 1

Part a(i)

272.73\text{272.73}

Retail price index

Calculate the

  1. Sum the prices of commodities in the base year (2019).

    Sum of base year prices(∑P0)=N600(rice)+N500(beans)=N1,100\text{Sum of base year prices} (\sum P_0) = \text{N}600 (\text{rice}) + \text{N}500 (\text{beans}) = \text{N}1,100

  2. Sum the prices of commodities in the current year (2022).

    Sum of current year prices(∑P1)=N1,000(rice)+N2,000(beans)=N3,000\text{Sum of current year prices} (\sum P_1) = \text{N}1,000 (\text{rice}) + \text{N}2,000 (\text{beans}) = \text{N}3,000

  3. Calculate the Retail Price Index (RPI).

    RPI=∑P1∑P0×100=N3,000N1,100×100≈272.73\text{RPI} = \frac{\sum P_1}{\sum P_0} \times 100 = \frac{\text{N}3,000}{\text{N}1,100} \times 100 \approx 272.73

    The Retail Price Index is 272.73\boxed{\text{272.73}}.

Part a(ii)

217.39\text{217.39}

Weighted retail price index if the consumer spends three times as much on rice than on beans

  1. Assign weights.

    If the consumer spends three times as much on rice as on beans, let the weight for beans (wBw_B) be 1 and the weight for rice (wRw_R) be 3.

  2. Calculate the weighted sum of prices for the base year (2019).

    ∑(P0×w)=(N600×3)+(N500×1)=N1,800+N500=N2,300\sum (P_0 \times w) = (\text{N}600 \times 3) + (\text{N}500 \times 1) = \text{N}1,800 + \text{N}500 = \text{N}2,300

  3. Calculate the weighted sum of prices for the current year (2022).

    ∑(P1×w)=(N1,000×3)+(N2,000×1)=N3,000+N2,000=N5,000\sum (P_1 \times w) = (\text{N}1,000 \times 3) + (\text{N}2,000 \times 1) = \text{N}3,000 + \text{N}2,000 = \text{N}5,000

  4. Calculate the Weighted Retail Price Index.

    Weighted RPI=∑(P1×w)∑(P0×w)×100=N5,000N2,300×100≈217.39\text{Weighted RPI} = \frac{\sum (P_1 \times w)}{\sum (P_0 \times w)} \times 100 = \frac{\text{N}5,000}{\text{N}2,300} \times 100 \approx 217.39

    The Weighted Retail Price Index is 217.39\boxed{\text{217.39}}.

Part a(iii)

Interpret your answer in (ii.) above

The weighted retail price index of 217.39 indicates that the cost of the consumer's weighted basket of goods (rice and beans) has increased by 117.39% (217.39 - 100) from 2019 to 2022.

Part b

Briefly explain the three motives for holding money

  1. Transactions Motive: Individuals and businesses hold money to facilitate everyday purchases and transactions. This motive arises because income and expenditure do not perfectly coincide in time.
  2. Precautionary Motive: Money is held as a buffer against unforeseen future expenses or emergencies. This allows individuals to cover unexpected costs without having to sell assets or borrow.
  3. Speculative Motive: People hold money to take advantage of future investment opportunities, particularly when they expect interest rates to rise (and bond prices to fall). By holding cash, they can buy assets at a lower price in the future.
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