Question

In Towneville, the average persons earns $15,000, and the CPI is 125. In Gutenberg, the average person earns $25,00 and the CPI is 225. Where would you choose to live, and why?

Answer 1

To determine where to live between Towneville and Gutenberg, one must compare the cost of living using the CPI to adjust the average income, which indicates the purchasing power in each city. The CPI is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

Step-by-step explanation:

The question essentially asks for a comparison of purchasing power in two different cities using the average income and the Consumer Price Index (CPI). To determine where you might choose to live, it's important to compare the relative cost of living in Towneville and Gutenberg by adjusting the average income by the CPI. The CPI is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care.

In Towneville, an average income of $15,000 with a CPI of 125 suggests that the cost of living has increased by 25% over the base CPI of 100. Conversely, in Gutenberg, an average income of $25,000 with a CPI of 225 suggests a 125% increase in the cost of living. To compare the purchasing power, one should standardize the income relative to the CPI. This could be done by dividing the average income by the CPI and comparing those numbers. The higher the resulting number, the greater the purchasing power, assuming CPI is a complete reflection of living costs. If the calculated purchasing power is higher in Towneville than in Gutenberg, despite the lower nominal income, Towneville might be the more cost-effective place to live.

Therefore, to decide where to live, you should consider not just the nominal income but also how it stands up against the local cost of living, which is what the CPI helps to illustrate.

Answer 2

I would choose to live in Townville. This is because the real wage of $12,000 in Townville is greater than the real wage of $11,111 in Gutenberg.

Step-by-step explanation:

Note: The correct amount which average persons earns in Gutenberg is $25,000, not $25,00 that is mistakenly written in the question.

The explanation to the answer is now provided as follows:

Where to live and why can be determined by comparing the real wages in Towneville and Gutenberg.

Real wage refers to the nominal wage that has been adjusted for inflation. The real wage can be calculated using the following formula:

Real wage = (Nominal wage / CPI) * 100 ……………. (1)

Where;

For Towneville:

Nominal wage = $15,000

CPI = Consumer price index, an inflation measure = 125

Substituting the values into equation (1), we have:

Real wage in Townville = ($15,000 / 125) * 100 = $120 * 100 = $12,000

For Gutenberg:

Nominal wage = $25,000

CPI = Consumer price index, an inflation measure = 225

Substituting the values into equation (1), we have:

Real wage in Gutenberg = ($25,000 / 225) * 100 = $111.11 * 100 = $11,111

Based on the calculations above, I would choose to live in Townville. This is because the real wage of $12,000 in Townville is greater than the real wage of $11,111 in Gutenberg.