In 1950, a phone call at a pay phone cost 5 cents and a first-class stamp cost 3 cents. Today, those prices are 50 cents and 49 cents respectively. What has happened to the price of each good relative to the other? What has happened to the price of each
good relative to all other goods?
What will be an ideal response?
The price of a phone call has decreased relative to a stamp. In 1950, the price of a phone call was 1.67 stamps, and today the price is 1.14 stamps. The opposite is true for stamps. In 1950 the price of a stamp was 0.60 phone call and today the price is 0.88 phone call. We cannot tell what has happened to the prices of phone calls or stamps relative to all other goods without knowing what the money prices of all other goods were in 1950 and today. All we can say is that phone calls have either increased less than stamps or decreased more than stamps.
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