Question

1. Calculating inflation using a simple price index

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.

	Quantity in Basket	2017		2018		2019
		Price	Cost	Price	Cost	Price	Cost
		(Dollars)	(Dollars)	(Dollars)	(Dollars)	(Dollars)	(Dollars)
Notebooks	10	3	30	3		4
Calculators	1	75	75	80		104
Large coffees	300	2	600	2		2
Energy drinks	75	2	150	4		5
Textbooks	8	90	720	110		120
Total cost			1,575
Price index			100

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 CSPI might overstate inflation in the cost of going to college? Check all that apply.

A new type of personal transporter, which made it easier to get around places like university campuses, became available for purchase.

Professors required each student to buy eight textbooks, regardless of the price.

The quality of textbooks increased dramatically from 2017 to 2019, with textbook companies bundling new online study aids with their books, but this quality change is hard to measure.

As the price of energy drinks increased relative to the price of coffee between 2017 and 2019, students decreased their consumption of energy drinks and increased their consumption of coffee.

Answer 1

.

	Quantity in Basket	2017		2018		2019
		Price	Cost	Price	Cost	Price	Cost
		(Dollars)	(Dollars)	(Dollars)	(Dollars)	(Dollars)	(Dollars)
Notebooks	10	3	30	3	30	4	40
Calculators	1	75	75	80	80	104	104
Large coffees	300	2	600	2	600	2	600
Energy drinks	75	2	150	4	300	5	375
Textbooks	8	90	720	110	880	120	960
Total cost			1,575		1890		2079
Price index			100		120		132

Between 2017 and 2018, the CSPI increased by 120-100/100*100 = 20%

Between 2018 and 2019, the CSPI increased by 132-120/120*100 = 10%

Which of the following, if true, would illustrate why price indexes such as the CSPI might overstate inflation in the cost of going to college:-

-Professors required each student to buy eight textbooks, regardless of the price