Question

1. Calculating inflation using a simple price index

Consider a fictional price index, the College Student Price Index (CSPI), based on a typical college student's annual purchases. Suppose the following table shows information on the market basket for the CSPI and the prices of each of the goods in 2017, 2018, and 2019.

The cost of each item in the basket and the total cost of the basket are shown for 2017.

Perform these same calculations for 2018 and 2019, and enter the results in the following table.

Suppose the base year for this price index is 2017 .

In the last row of the table, calculate and enter the value of the CSPI for the remaining years.

Between 2017 and 2018 , the CSPI increased by _______ . Between 2018 and 2019, the CSPI increased by _______ .

Which of the following, If true, would illustrate why price indexes such as the CSPI might overstate inflation in the cost of going to college? Check all that apply.

• As the price of calculators rose, fewer students decided to buy them, opting instead to use the free calculators in their cell phones or on their computers.

• Energy drinks became increasingly popular on college campuses between 2017 and 2019 due to significant improvements in flavor, but this quality change is hard to measure.
  

• Professors required each student to buy 10 textbooks, regardless of the price.

• A new mobile device for personal computing became available for purchase.

Answer 1

		2017		2018		2019
	Quantity in baskets	Price($)	Cost($)	Price($)	Cost($)	Price($)	Cost($)
Notebooks	15	2	30	5	75	8	120
Calculators	1	70	70	100	100	130	130
Large coffees	250	2	500	2	500	2	500
Energy drinks	50	2	100	4	200	6	300
Textbooks	10	120	1200	150	1500	180	1800
Total cost			1,900		2,375		2,850
Price index			100		125		150

Between 2017 and 2018 CSPI increase by = [(125 - 100) / 100] * 100 = 25%

Between 2018 and 2019 CSPI increase by = [(150 - 125) / 125] * 100 = 20%

Ans:

• As the price of calculators rose, fewer students decided to buy them, opting instead to use the free calculators in their cell phones or on their computers.
• Energy drinks became increasingly popular on college campuses between 2017 and 2019 due to significant improvements in flavor, but this quality change is hard to measure.
• A new mobile device for personal computing became available for purchase.