A labor contract provides for a first-year wage of $10 per hour, and specifies that the real wage will rise by 3 percent in the second year of the contract. The CPI is 1.00 in the first year and 1.07 in the second year. What dollar wage must be paid in the second year?
A) $10.30
B) $10.70
C) $11.00
D) $11.02

Question

Quizplus · Accepted Answer

To calculate the real wage in the second year of the contract, we need to adjust the nominal wage by the inflation rate.

Real wage in the second year = nominal wage in the second year / CPI index in the second year

We know that the nominal wage in the first year is $10 per hour. In the second year, the nominal wage will be 3% higher, so:

Nominal wage in the second year = $10 × (1 + 0.03) = $10.30 per hour

The CPI index in the second year is 1.07.

Real wage in the second year = $10.30 / 1.07 = $9.62 per hour

Therefore, the correct answer is D) $11.02. To maintain the real wage at the same level as in the first year, the nominal wage in the second year must increase by the same percentage as the inflation rate. Therefore:

Nominal wage in the second year = $10 × (1 + 0.07) = $11.00 per hour

So, the dollar wage that must be paid in the second year is $11.00.

A Labor Contract Provides for a First-Year Wage of $10