Question

The table below lists the prices from last year and the base year for a college-related basket of goods. Assume that the typical basket of goods for a college student consists of 190 gallons of gas, 65 pizzas, 50 6-packs, and 2 textbooks. Besket of College-Releted Goods Price Base Year Price Last Year Basket of 6oods (dollars) S 2.35 (dollars) $ 2.80 Gasoline (per gallon) Pizza (per pizza) teer (per 6-pack) Textbook (per book) 5.25 8.55 4.35 7.21 ces 106.e0 236.00 Instructions: Round your answers to two decimal places a. Using the values above, what is the rate of inflation between the base year and last year? b. Assume that rather than buying textbooks for their courses lost year, all students decided to buy online access cards at $105 per textbook. What is the rate of Inflation between the bese year and last year now?

Answer 1

a)

Total dollar expenditure on market basket in current year CPI = Total dollar expenditure on market basket in base year - X 100

CPI in base year = 100

Total dollar expenditure on market basket in last year = 190 x $ 2.80 + 65 x $ 8.55 + $ 7.21 x 50 + $ 236 x 2

Total dollar expenditure on market basket in last year = $ 1,920.25

Total dollar expenditure on market basket in base year = 190 x $ 2.35 + 65 x $ 5.25 + $ 4.35 x 50 + $ 106 x 2

Total dollar expenditure on market basket in base year = $ 1,217.25

$ 1,920.25 CPI last year = $ 1,217.25 X 100

CPI last year = 157.75

CPI last year - CPI base year Inflation rate = 1 -x 100 CPI base year

Inflation rate = 157.75 -100 - X 100 100

Rate of inflation between base year and last year = 57.75%

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b)

Total dollar expenditure on market basket in last year = 190 x $ 2.80 + 65 x $ 8.55 + $ 7.21 x 50 + $ 105 x 2

Total dollar expenditure on market basket in last year = $ 1,658.25

$ 1,658.25 CPI last year = $ 1,217.25 X 100

CPI last year = 136.23

136.23 - 100 Inflation rate = 100x100

Rate of inflation between the base year and last year = 36.23%