Question

Consider a fictional price index, the College Student Price Index (CSPI), based on a typical college student's annual purchases. Suppose the following table shows information on the market basket for the CSPI and the prices of each of the goods in 2017, 2018, and 2019. 

The cost of each item in the basket and the total cost of the basket are shown for 2017.

Perform these same calculations for 2018 and 2019, and enter the results in the following table.

Suppose the base year for this price index is 2017. 

In the last row of the table, calculate and enter the value of the CSPI for the remaining years. 

Between 2017 and 2018, the CSPI increased by _______ %. Between 2018 and 2019, the CSPI increased by _______ %.

Which of the following. If true, would illustrate why price indexes such as the CPI might overstate Inflation in the cost of going to college? Check all that apply 

• Professors required each student to buy 10 notebooks, regardless of the price 

• As the price of textbooks increased, more and more students turned to the used-book market or chose not to buy textbooks at all, instead using the copies on reserve in the library. 

• The quality and design of calculators improved dramatically from 2017 to 2019. For example, calculators made in 2019 accept memory cards, whereas those made in 2017 do not, but this quality change is hard to measure. 

• A new, safe method of memory enhancement became available for purchase.

Answer 1

Cost of each item is calculated as follows -

Cost = Quantity * Price

Price index is calculated as follows -

Price Index = [Total cost of basket in current year/Total cost of basket in base year] * 100

Based on the above formula, following is the complete table -

Calculate the increase in CSPI between 2017 and 2018 -

Percentage increase = [(Price index in 2018 - Price index in 2017)/Price index in 2017] * 100

Percentage increase = [(120 - 100)/100] * 100 = 20%

Between 2017 and 2018, the CSPI increased by 20%.

Calculate the increase in CSPI between 2018 and 2019 -

Percentage increase = [(Price index in 2019 - Price index in 2018)/Price index in 2018] * 100

Percentage increase = [(132 - 120)/120] * 100 = 10%

Between 2018 and 2019, the CSPI increased by 10%.

Following would lead to overstating of inflation -

1. As the price of textbooks increased, more and more students turned to the used-book market or chose not to buy textbooks at all, instead using the copies on reserve in the library.

2. Tthe quality and design of calculators improved dramatically from 2017 to 2018. For example, calculators made in 2019 accept memory cards, whereas those made in 2017 do not, but this quality change is hard to measure.

3. A new, safe method of memory enhancement became available for purchase.