Question

Consider the effects of inflation in an economy composed of only two people: Manuel, a bean farmer, and Poornima, a rice farmer. Manuel and Poornima both always consume equal amounts of rice and beans. In 2016 the price of beans was $1, and the price of rice was $4.

Suppose that in 2017 the price of beans was $2 and the price of rice was $8.

Inflation was __%?

.

Indicate whether Manuel and Poornima were better off, worse off, or unaffected by the changes in prices.

	Better Off	Worse Off	Unaffected
Manuel
Poornima

Now suppose that in 2017 the price of beans was $2 and the price of rice was $4.80.

In this case, inflation was __%?

.

Indicate whether Manuel and Poornima were better off, worse off, or unaffected by the changes in prices.

	Better Off	Worse Off	Unaffected
Manuel
Poornima

Now suppose that in 2017, the price of beans was $2 and the price of rice was $1.60.

In this case, inflation was __%?

.

Indicate whether Manuel and Poornima were better off, worse off, or unaffected by the changes in prices.

	Better Off	Worse Off	Unaffected
Manuel
Poornima

What matters more to Manuel and Poornima?

- The relative price of rice and beans

- The overall inflation rate

Answer 1

# when price of beans rises yo $2& that of rice goes upto $8 in 2017-------

* Inflation rate = 100%

* Both Manuel and Poornima are unaffected by the price

Explanation-----

To find inflation rate ,first we will have to find CPI

Inflation rate = {(CPI 2017--- CPI2016)/ CPI2016}×100

Finding CPI------

	2016(p0)$	2017(p1)$	R=(p1/p0)×100
Beans	1	2	200 (2/1)×100=200
Rice	4	8	(8/4)×100=200
			Total=400

CPI= summation R/N

400/2=200

Inflation rate=( 200-100/100)×100=100%

* Both farmers are uneffected as wirh the increase in inflation rate by 100%, the ,the CPI is also increases from 100 to 200.

# When price of beans becomes $2& price of rice is 4•80$---------

* Inflation rate = 60%

* Manual is better off while poornima is worse off

Explanation-----

	P0($)	p1($)	R=(p1/p0)100
Beans	1	2	(2/1)100=200
Rice	4	4•80	(4•80/4)100= 120
			320

Cpi= 320/2=160

Inflation rate= (160-100/100)100=60%

* Manual is better off because price of

beans has doubled while inflation rate is 60%

* Poornima is worse off because price of rice increase by 20% and inflation rate is 60% in case of rice.

# When price of beans goes upto $2 & price of rice goes down to 1•60$

* Inflation rate = 20%

* Manual is better off while poornima is worse off

Explanation-----

	P0($)	p1($)	R
Beans	1	2	(2/1)100=200
Rice	4	1•60	(1•60/4)100=40
			Total= 240

CPI= 240/2=120

Inflation rate =( 120-100/100)100=20%

* Manual is better off as price of beans increase by 100% while inflation rate is 20%

* Poornima is worse off as price of rice decrease (by 60%) and there is inflation rate 20%