Question

Celestria starts a job that pays $50,000 a year. Her mother started a similar job in 1983 that paid $25,000. The CPI in 1983 was 100, and the CPI this year is 210. Who is better off in real wages?

a) Her mother because Celestria's wage is equal to $18,750 in 1983
b) Celestria because she earns $25,000 more than her mother did
c) Celestria because her wage is equal to $28,500 in 1983
d) Her mother because her wage in 1983 is equal to $52,500 today

Answer 1

The mother's wage in 1983, adjusted for inflation using the CPI to today's dollars, is $52,500 which is higher than Celestria's current salary. Thus, her mother was better off in terms of real wages.

Step-by-step explanation:

The question asks who is better off in real wages between Celestria, who starts a job that pays $50,000 a year, and her mother who started a job in 1983 that paid $25,000. To answer this, we need to compare their salaries adjusted for inflation using the Consumer Price Index (CPI). The CPI for Celestria's current year is 210, and for her mother's wage in 1983, it was 100. The formula to adjust the mother's wage to today's dollars is:

Mother's real wage = (Old wage / Old CPI) * Current CPI

Using this formula gives us:

Mother's real wage = ($25,000 / 100) * 210 = $52,500

This means that Celestria's mother's salary in 1983, adjusted to current dollars, is higher than Celestria's current salary. Therefore, the answer to the question is d) Her mother because her wage in 1983 is equal to $52,500 today.