Question

Consider the information in the table regarding prices of three goods (alpha, beta, gamma) and the quantities purchased by two individuals (Warren and Frank).

Good	Price year 1	Price year 2	Warren	Frank
Alpha	$2.10	$2.25	5	10
Beta	$5.10	$5.80	5	5
Gamma	$3.05	$2.90	10	5

Based on this information, Warren feels like the inflation rate was __ % and Frank feels like the inflation rate was __ %.

Answer 1

Solution:-

Warren:-

Cost of the basket for Year 1 = (2.10 * 5) + (5.10 * 5) + (3.05 * 10) = 10.5 + 25.5 + 30.5 = 66.5

Cost of the basket for Year 2 = (2.25 * 5) + (5.80 * 5) + (2.90 * 10) = 11.25 + 29 + 29 = 69.25

CPI for year 1 =100

CPI for year 2 = Cost of the basket for Year 2 / Cost of the basket for Year 1 * 100

= 69.25 / 66.5 * 100

= 104.14

Inflation rate = CPI year 2 - CPI year 1 / CPI year 1 * 100

= 104.14 - 100 / 100 * 100

= 4.14

Frank:-

Cost of the basket for Year 1 = (2.10 * 10) + (5.10 * 5) + (3.05 * 5) = 21 + 25.5 + 15.25 = 61.75

Cost of the basket for Year 2 = (2.25 * 10) + (5.80 * 5) + (2.90 * 5) = 22.5 + 29 + 14.5 =66

CPI for year 1 =100

CPI for year 2 = Cost of the basket for Year 2 / Cost of the basket for Year 1 * 100

= 66 / 61.75 * 100

= 106.88

Inflation rate = CPI year 2 - CPI year 1 / CPI year 1 * 100

= 106.88 - 100 / 100 * 100

= 6.88

Based on this information, Warren feels like the inflation rate was 4.14% and Frank feels like the inflation rate was 6.88%.