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Suppose industry abatement costs rise from $850 million in 2004 to $1,000 million in 2005 in nominal terms and that the CPI is 100 in 2004 and 106 in 2005.
a. Evaluate the change in costs over the period in real terms, first in 2004 dollars and them in 2005 dollars.
b. Are your answers the same? Explain why or why not.

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Solution Summary

This solution evaluates the change in costs over the period in real terms.

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Abatement Cost in 2004 (in 2004 dollars)= $850 million
Abatement Cost in 2005 (in 2005 dollars)= $1000 million
Abatement Cost in 2004 (in 2005 dollars)= Abatement Cost in 2004 (in 2004 dollars)*CPI in 2005 / CPI in 2004
=850*106/100 = $901 million
Abatement Cost ...

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