Question

1. The table below shows the prices and quantities of food items that the typical college student purchased from 2011 to 2014. What is the amount spent each year on the “basket” of food with the quantities shown in column 2?

Items	Qty	2011 Price	2011 Amount Spent	2012 Price	2012 Amount Spent	2013 Price	2013 amount Spent	2014 Price	2014 amount spent
Bread	10	1.10		1.12		1.15		1.16
Canned Goods	15	0.86		0.87		0.87		0.90
Meat/Dairy	5	3.15		3.75		4.02		3.87
Produce	10	1.01		0.99		1.02		0.99
Total

Construct the price index for a “food basket” in each year using 2013 as the base year.

Compute the annual and overall inflation rate for food prices from 2011 to 2014.

Answer 1

Answer:

Items	Quantity	2011 Price	2011 Amount Spent = Price of 2011 x quantity	2012 Price	2012 Amount Spent = Price of 2012x quantity	2013 Price	2013 Amount Spent = Price of 2013x quantity
Bread	10	1.10	11	1.12	11.0	1.15	11.5
Canned goods	15	0.86	12.9	0.87	13.05	0.87	13.05
Meat/dairy	5	3.15	15.75	3.75	18.75	4.02	20.1
Produce	10	1.01	10.1	0.99	9.9	1.02	10.2
Total	40	6.12	49.75	6.73	52.7	7.06	54.85

The amount spent each year on the basket of food

Amount spent on the year 2011 = $49.75

Amount spent on the year 2012 = $52.7

Amount spent on the year 2013 = $54.85

The price index assuming 2003 as the base year

Year	Price index = (Amount spend in current year/ Amount spend in base year ) x 100
Price index of the year 2011	= (49.75/54.85)x100 = 90.70
Price index of the year 2012	= (52.7 / 54.85)x100 = 96.08
Price index of the year 2013 Base year	= (54.85 / 54.85)x100 = 100.00

The inflation rate for fruit price from 2011 to 2013

Year	Price index	Inflation Rate = {(CPI in the current year – CPI in the previous year)/CPI in the previous year } x 100
Inflation rate of the year 2011	90.70
Inflation rate of the year 2012	96.08	= [96.08 – 90.70 ] /90.70 * 100 = 5.93%
Inflation rate of the year 2013	100.00	= [100 – 96.08] / 96.08 * 100 = 4.07%