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Assume that a typical consumer's basket consists of 10 lbs of beef and 20 lbs of...

Assume that a typical consumer's basket consists of 10 lbs of beef and 20 lbs of chicken. also assume that 2011 is used as the base year in the CPI calculation. Use the data below to answer the following two questions.

a. Calculate the CPI in years 2010, 2011, and 2012

b. Calculate the inflation rate between 2010 and 2011 and between 2011 and 2012.

Year	Beef price/lb	Chicken price/lb
2010	$4	$4
2011	$5	$5
2012	$9	$6

Solutions

Expert Solution

Assume that a typical consumer's basket consists of 10 lbs of beef and 20 lbs of chicken. also assume that 2011 is used as the base year in the CPI calculation.

Year	Beef price/lb	Chicken price/lb
2010	$4	$4
2011	$5	$5
2012	$9	$6

--------

a. Calculate the CPI in years 2010, 2011, and 2012

CPI in 2010

Value of basket = (10 x 4) + (20 x 4) = $120

CPI in 2011

Value of basket = (10 x 5) + (20 x 5) = $150

(This is the base year)

CPI in 2012

Value of basket = (10 x 9) + (20 x 6) = $210

----

b. Calculate the inflation rate between 2010 and 2011 and between 2011 and 2012.

Inflation is the rate of change of CPI.

Between 2010 and 2011,

Inflation =

= 25%

---

Between 2011 and 2012,

Inflation =

= 40%

Rahul Sunny answered 1 month ago

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