Econ 1 Price Index (E1PI) Item Quantity in Basket 2011 Price 2012 Price 2013 Price Cartoon...

Econ 1 Price Index (E1PI)

*Item*	*Quantity in Basket*	*2011 Price*	*2012 Price*	*2013 Price*
Cartoon Book	1	$10	$12	$12
Blue Book	5	$0.25	$0.50	$1.00
Scantron	5	$0.10	$0.15	$0.25
Calculator	1	$4	$5	$6

The table above shows the market basket for an Econ 1 student. Use this data to calculate the E1PI

Suppose the base year is 2011. What is the value of the price index in 2011?

Suppose the base year is 2011. What is the value of the price index in 2012?

Suppose the base year is 2011. What is the value of the price index in 2013?

What is the rate of inflation from 2012 to 2013?

Suppose a student’s wage is $8 per hour in 2011 and $9 per hour in 2013. In which year is this student earning more in real terms?

Equilibrium occurs where supply and demand meet. Why? (Explain what happens when price is set above equilibrium and when price is set below equilibrium.)

The most important factor in determining the quantity demanded or quantity supplied is …..? (Think about the model. What are the variables on the graph?)

Pepperoni is an input in making pizza. What happens to price and quantity in the pizza market when the price of pepperoni increases? Suppose that beer and pizza are complements. What happens in the beer market when the price of pepperoni increases?

Solutions

Expert Solution

a) CPI index = (current price value of basket/price value of basket in base year) x100

b) current price value of basket for
Year 2011 = (1*10 + 5*0.25 + 5*0.10 + 1*4) = $ 15.75
   Year 2012 = (1*12 + 5*0.50 + 5*0.15 + 1*5) = $20.25
  Year 2013 = (1*12 + 5*1 + 5*0.25 + 1*6) = $24.25

price value of basket as 2011 as base year for
Year 2011 = (1*10 + 5*0.25 + 5*0.10 + 1*4) = $ $15.75
   Year 2012 = (1*10 + 5*0.25 + 5*0.10 + 1*4) = $15.75
  Year 2013 = (1*10 + 5*0.25 + 5*0.10 + 1*4) = $15.75

c) 2011 as base year
CPI for Year 2011 = (15.75/15/75 )*100 = 100
CPI for Year 2012 = (20.25/15.75)*100 = 128.57
CPI for Year 2013 = (24.25/15.75)*100 = 153.97

d) Rate of inflation = (CPIx+1 - CPIx) / CPIx
Inflation rate from 2012 to 2013 = (153.97-128.57)/128.57 = 19.76%

e) converting yesterday's dollar into today's dollar
Y2011->2013 = Y2011 x (CPI2013 / CPI2011) = $8 x (153.97/100) = $12.32
Hence, the student earning is more in year 2011 in real terms

Rahul Sunny answered 1 year ago

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