Question

5. Suppose that you and your dorm mates decide to construct a Halloween Party Price Index. After careful research you have come up with the following information:

Halloween Party Price Index
item	quantity	price in 2018	price in 2019
36 oz. bag of candy bars	4	$2.00	$4.75
gallon of apple cider	2	$2.50	$3.00
one-half keg of beer	1	$90.00	$100.00
Teenage Mutant Ninja Turtles costumes	4	$14.00	$18.00
16 oz. plastic cups	100	$0.03	$0.05
13 oz. bag Tostitos	6	$3.00	$4.00
24 oz. jar salsa	2	$4.00	$3.00
pumpkins	4	$2.00	$2.50
candles	4	$1.00	$2.00

Assume that 2018 is the base year.

a. What is the cost of a Halloween Party in 2018?

b. What is the cost of a Halloween Party in 2019?

c. Construct a Halloween Party Price Index (HPPI) for 2018.

d. Construct a Halloween Party Price Index (HPPI) for 2019.

e. Using the HPPI, what is the rate of inflation?

Answer 1

a. The cost of a Halloween Party in 2018 = Sum of (Quantity*Respective prices in 2018) = (4*2) + (2*2.5) + (1*90) + (4*14) +
(100*0.03) + (6*3) + (2*4) + (4*2) + (4*1) = 8 + 5 + 90 + 56 + 3 + 18 + 8 + 8 + 4 = 200

b. The cost of a Halloween Party in 2019 = Sum of (Quantity*Respective prices in 2019) = (4*4.75) + (2*3) + (1*100) + (4*18) +
(100*0.05) + (6*4) + (2*3) + (4*2.5) + (4*2) = 19 + 6 + 100 + 72 + 5 + 24 + 6 + 10 + 8 = 250

c. Halloween Party Price Index (HPPI) for 2018 = (Cost in 2018/Cost in base year)*100 = (200/200)*100 = 100

d. Halloween Party Price Index (HPPI) for 2019 = (Cost in 2019/Cost in base year)*100 = (250/200)*100 = 125

e. Inflation rate = [(HPPI for 2019-HPPI for 2018)/HPPI for 2018]*100 = [(125-100)/100]*100 = 25%