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.

	Quantity in Basket	2017		2018		2019
		Price	Cost	Price	Cost	Price	Cost
		(Dollars)	(Dollars)	(Dollars)	(Dollars)	(Dollars)	(Dollars)
Notebooks	10	2	20	1		3
Calculators	1	50	50	54		75
Large coffees	200	1	200	1		1
Energy drinks	100	2	200	3		4
Textbooks	10	100	1,000	120		150
Total cost			1,470
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.

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

A new mobile device for personal computing became available for purchase.

As the price of calculators rose, fewer students decided to buy them, opting instead to use the free calculators in their cell phones or on their computers.

Energy drinks became increasingly popular on college campuses between 2017 and 2019 due to significant improvements in flavor, but this quality change is hard to measure.

Answer 1

Pls see table below.

Between 2017 and 2018, CSPI increase by 20%, which is (120-100)/100

Between 2018 and 2019, CSPI increase by 25%, which is (150-120)/120

None of the statements given illustrates why price indexes such as CSPI might overstate inflation in the cost of going to college. The only one which is partially correct is about the energy drinks, the price of which went up by 50% in 2017 to 2018, and by 33% in 2018 to 2019, whereas the overall CSPI increased by 20% and 25% only. The reason is that energy drinks are not a necessary part of the cost of college education.

	Quantity in Basket	2017		2018		2019
		Price	Cost	Price	Cost	Price	Cost
		(Dollars)	(Dollars)	(Dollars)	(Dollars)	(Dollars)	(Dollars)
Notebooks	10	2	20	1	10	3	30
Calculators	1	50	50	54	54	75	75
Large coffees	200	1	200	1	200	1	200
Energy drinks	100	2	200	3	300	4	400
Textbooks	10	100	1,000	120	1200	150	1500
Total cost			1,470		1764		2205
Price index			100		120		150