Answer to Question #58361 in Microeconomics for Allie

Question

After graduating from college in 2010, Art Major\'s starting salary is $45757.00. Suppose Art Major has a cost of living adjustment (COLA) clause, i.e. an escalator clause in his labor contract so that he will be able to maintain this same level of purchasing power in real terms in 2011 and 2012. Using the information in the table below, how much will Art Major be earning in 2011 and 2012 if his salary keeps up with inflation? Round your answers to the nearest dollar.

Questions:

1) What is Art Major Salary in 2011

2) What is Art Major Salary in 2012

Answer 1

Starting salary is $45757.00. Year 2010 deflator is 101.57, Year 2011 - 104.90, Year 2012 - 108.04.
1) Art Major Salary in 2011 was $45,757*104.9/100 = $47,999, as to have the same purchasing power, we should consider inflation.
2) Art Major Salary in 2012 was $45,757*108.04/100 = $49,435.86.