Question

5. In an imaginary economy, consumers buy only hot dogs and hamburgers. The fixed basket consists of 19 hot dogs and 8 hamburgers. A hot dog cost $2.25 in 2006 and 3.70 in 2007. A hamburger cost $5.75 in 2006 and $7.86 in 2007. Calculate the CPI for both years and then find the inflation rate. 6. In an imaginary economy, consumers buy only sandwiches and magazines. The fixed basket consists of 25 sandwiches and 40 magazines. In 2006, a sandwich cost $4.50 and a magazine cost $4.99. In 2007, a sandwich cost $7.75. If the inflation rate in 2007 was 21 percent, then how much did a magazine cost in 2007?

Answer 1

5) when we calculate inflation for 2007 ,we would take 2006 as base year .The base year CPI remain at 100.

Basket cost in 2006=19*2.25+8*5.75=88.75

Basket cost in2007=19*3.4+8*7.86=127.48

CPI of 2007= basket cost in 2007/basket cost in base year (2006)*100

CPI 2007=127.48/88.75)*100=1.4364*100=143.64

Inflation rate=( CPI 2007 - CPI 2006)

Inflation rate=(143.64-100)=43.64%