Mark has a two-year wage contract with his employer. Mark's wage contract specifies a $50,000 salary for the first year, and a salary increase equal to the percentage increase in the CPI during the second year. The percentage increase in the CPI during the year was 4.0 percentage points. If the CPI overstates inflation by 1.0 percentage point, at the end of the first year Mark's salary increased by ________ more than it would have without the upward bias.

Question

Quizplus · Accepted Answer

The CPI overstates inflation by 1.0 percentage point, so instead of the actual inflation rate, Mark's salary increase is based on a 4.0% increase. Without the upward bias, the increase would have been based on a 3.0% rate. The difference in salary increase due to the 1.0 percentage point bias on a $50,000 salary is $500 ($50,000 * 1.0% = $500).

Mark Has a Two-Year Wage Contract with His Employer