Question

Question Completion Status: QUESTION 37 Suppose a market basket consists of the following goods: 50 pens 100 notepads 200 paper clips Also assume that price per unit for these goods is as follows for the years noted, and 2010 is the base year. What is the value of the price index in 2011? PRICE IN PRICE IN 2010 2011 PENS $ 0.25 $0.30

Answer 1

The cost of a basket of goods can be calculated by multiplying the quantities by the respective prices of all the goods in the basket and adding them together.

So, the cost of basket in current year is (50)(0.30) + (100)(0.25) + (200)(0.15) which equals 15 + 25 + 30 = $70 and the cost of the basket in the base year is (50)(0.25) + (100)(0.30) + (200)(0.10) which equals 12.50 + 30 + 20 = $62.50.

The value of the price index is calculated by the following formula:

$Price\:Index=\frac{Cost\:of\:Basket\:in\: Current\:Year}{Cost\:of\:Basket\:in\:Base\:Year}\times100$

Putting the values:

Price Index = 70 62.50 x 100 = 112

So, the value of the price index in 2011 is 112. Therefore, the correct answer is 'Option A'.