Question

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 tem 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 Quantity in Basket 15 2017 2015 Price Cost Price Cost (Dollars) (Dollars) (Dollars) (Dollars) 2 30 2019 Price Cost (Dollars) (Dollars) 8 70 20 100 Notebooks Calculators Large coffees Energy drinks Textbooks 1 250 130 2 500 2 2 50 2 100 4 10 120 1,200 6 180 150 Total cost Price index 1.900 100 Suppose the base Year for this price index is 2017 In the last row of the table, calculate and enter the value of the CSP for the remaining years Between 2017 and 2016, the CSP Increased by Between 2015 and 2019, the Screased by Which of the following, trun, would thustrate why price indexes such as the CSP right overstate ination in the cost ot going to come? that apply A new mobile device for personal computing became a ble for purch MacBook Air 20 * $ 4 % 5 4 3 & 7 6 8 0

Answer 1

2017 Price Cost 2 30 2018 Price Cost 5 75 2019 Price Cost 8 120 70 70 100 100 130 130 2 500 2 500 2 500 quantity in basket Notebooks 15 calculators 1 large coffee 250 energy drinks 50 textbooks 10 total cost Price index 2 100 4 200 6 300 120 1200 150 180 1900 1500 2375 125 1800 2850 150 100

Cost = price * quantity.

Price index = (total cost in current year / total cost in base year)*100

Base year is 2017

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CSPI is price index

Between 2017 and 2018 CSPI increased by 25%

i.e., % change in CSPI between 2017 and 2018 = [(CSPI in 2018 - CSPI in 2017) / CSPI in 2017]*100

=>% change in CSPI between 2017 and 2018 = [(125 -100) / 100]*100

=> % change in CSPI between 2017 and 2018 = 25%

and

Between 2018 and 2019 CSPI increased by 20%

i.e., % change in CSPI between 2018 and 2019 = [(CSPI in 2019 - CSPI in 2018) / CSPI in 2018]*100

=>% change in CSPI between 2018 and 2019 = [(150 -125) / 125]*100

=> % change in CSPI between 2018 and 2019 = 20%

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Following, if true, would illustrate why price indexes such as the CSPI might overstate inflation in the cost of going to college.

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

• Energy drinks became increasingly popular on college campuses between 2017 and 2019 due to significant improvements in flavor.

• 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

Answer: Option (A), (B) and (C)