In a simple economy, people consume only two goods: food and clothing. The market basket of...

In a simple economy, people consume only two goods: food and clothing. The market basket of goods used to compute the CPI has 65 units of food and 22 units of clothing.

	Food	Clothing
Last year’s price	$ 4	$ 16
This year’s price	$ 8	$ 19

a) What are the percentage increases in the price of food? ____________

b) What are the percentage increases in the price of clothing? ____________

c) What is the percentage increase in the CPI? ____________

Expert Solution

Data given:

Food -
- Amount = 65 units
- Last year's price = $ 4
- This year's price = $ 8
Clothing -
- Amount = 22 units
- Last year's price = $ 16
- This year's price = $ 19

Calculation:

(a) Percentage increase in price of food = (this year's price – last year's price)/last year's price × 100 %

= (8 – 4)/4 × 100 %
= 4/4 × 100 %
= 100 %

(b) Percentage increase in price of clothing = (this year's price – last year's price)/last year's price × 100 %

= (19 – 16)/16 × 100 %
= 3/16 × 100 %
= 18.75 %

(c) percentage increase in CPI = (CPI in this year – CPI in last year)/CPI in last year × 100 %

= [{(8×65) + (19×22)} – {(4×65) + (16×22)}] ÷ [(4×65) + (16×22)] × 100 %
= [(520 + 418) – (260 + 352)] ÷ (260 + 352) × 100 %
= (938 – 612)/612 × 100 %
= 326/612 × 100 %
= 0.5327 × 100 %
= 53.27 %

Rahul Sunny answered 1 year ago

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In a simple economy, people consume only two goods: food and clothing. The market basket of...

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