In year 1 and year 2, there are two products produced in a given economy: apples...

In year 1 and year 2, there are two products produced in a given economy: apples and oranges. Suppose that there are no intermediate goods. In year 1, 10 apples are produced and sold at $4 each, and in year 2, 8 apples are produced and sold at $5 each. In year 1, 2 oranges are sold for $12 each, and in year 2, 5 oranges are sold for $6 each.

What is the CPI for year 2 using year 1 as a base year?

a)

$78

b)

$160

c)

$97

d)	None of the above

Expert Solution

cost of year 1 basket in year 1 prices = 10*4 + 2*12 = 64

cost of year 1 basket in year 2 prices = 10*5 + 2*6 = 62

CPI for year 2 = (cost of year 1 basket in year 2 prices / cost of year 1 basket in year 1 prices)*100

= (62/64)*100 = 96.9 = 97

Thus, the answer is (c) $97

Rahul Sunny answered 2 years ago

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