Question

In: Economics

Suppose an economy has only three goods and the typical family purchases the amounts given in...

Suppose an economy has only three goods and the typical family purchases the amounts given in the following table. The base year is 2012.

Product	Quantity (2012)	Price (2012)	Price (2017)
Hair cuts	6	$50	$80
Backpacks	4	$25	$30
Tacos	100	$1.00	$5.00

b. Compute the cost of consumption basket in 2012 and 2017 using base year quantities.

c. What is the CPI for in 2017?

d. What is the inflation rate between 2012 and 2017?

Expert Solution

b.

Consumption in 2012 = Quantity × Price

= (6 × 50) + (4 × 25) + (100 × 1)

= 300 + 100 + 100

= $500 (Answer)

Consumption in 2017 = Quantity × Price

= (6 × 80) + (4 × 30) + (100 × 5)

= 480 + 120 + 500

= $1,100 (Answer)

c.

CPI for 2017 = (Consumption in 2017 / Consumption in 2012) × 100

= (1,100 / 500) × 100

= 220 (Answer)

CPI of the base year (2012) is always 100.

d.

Inflation rate = (Difference in CPI / CPI of 2012) × 100

= [(220 – 100) / 100) × 100

= (120 / 100) × 100

= 120% (Answer)

Rahul Sunny answered 1 year ago

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