Question

Assume that McLean prevails in his negligence and/or strict liability lawsuits. In determining the amount of damages he may recover for loss of earnings consider the following: McLean’s medical condition is such that he is unable to ever work again; he was 53 years of age at the time of the injury and would have been expected to retire at the age of 65; his life expectancy at the time of the injury was 77 years of age; he is an employee of the United States Postal Service covered by a union contract projecting his wages to rise by 3% per year in real terms plus an annual Cost of Living Adjustment (COLA) equal to the rate of inflation; and his current annual gross salary is $48,000.

a. Table 2 below contains the Consumer Price Index (CPI) for each of the past 10 years. Determine the average annual percentage change in the CPI over the past 10 years. Explain the meaning of this statistic. What assumptions would have to be made about monetary policy in the next 12 years to assume the average annual percentage change in the CPI over the past 10 years can be used to predict future inflation rates?

b. Assume that 25% of McLean’s income is paid in state and federal income taxes and that he will not receive any state or federal assistance due to his medical condition. Using the information provided above and your results in 4.a., project the likely amount of an award to McLean for lost future income based on a present value rate of 8%.

Table 2: Year End Consumer Price Index (CPI) for the Years 1999 to 2008

Year Year End
CPI Value
1999 148.2
2000 152.4
2001 156.6
2002 162.5
2003 166.2
2004 169.8
2005 176.0
2006 183.1
2007 192.6
2008 199.0

Answer 1