Question

2. Suppose that the residents of Vegopia spend all of their income on cauliflower, broccoli, and carrots. In 2014 they buy 100 heads of cauliflower for $200, 50 bunches of broccoli for $75, and 500 carrots for $50. In 2015 they buy 75 heads of cauliflower for $225, 80 bunches of broccoli for $120, and 500 carrots for $100. If the base year is 2014, what is the CPI in both years? What is the inflation rate in 2015?

Answer 1

Sol:--

Since the base year is 2014, the CPI is 100. To calculate the CPI for 2015 , you need to calculate the total basket of goods in both years.

2014: $200+$75+$50=$325
2015: $225+$120+$100=$445

CPI: [(Total Dollar Purchases Year 1)/(Total Dollar Purchases Year 0)]*100

($445/$325)*100=136.92

Therefore your CPI is 136.92 for 2015.

c) Inflation is the rate of change of the prices after some period. You need to calculate the prices per unit in one year, find their total and compare them to the second year. In this case:

2010: $2/Head of Cauliflower, $1.5/Bunch of Broccoli $.10/Carrot - Total of prices per unit = $3.60
2011: $3/Head of Cauliflower, $1.5/Bunch of Broccoli $.50/Carrot - Total of prices per unit = $5.00

Inflation calculation= [(Prices in Year 1 - Prices in Year 0)/Prices in Year 0]*100

[($5.00-$3.60)/$3.60]*100=38.8888%

Therefore the rate of inflation is 38.89% for 2015.