Question

1. Consider the following table which outlines a simplified basket of goods comprised of three goods, Cheeseburgers, Baseball Tickets, and Toilet Paper. The prices over the last three years are provided.

		Prices
	Quantity in Basket	2016	2017	2018
Cheeseburgers	20	$5	$5	$6
Baseball Tickets	5	$20	$25	$30
Toilet Paper	40	$1	$1	$1

1. Calculate the cost of the basket of goods in:
   1. 2016

2. 2017

3. 2018

2. What was the inflation between 2016 and 2017?

3. What was the inflation between 2017 and 2018?

4. Using 2016 as the base year. Construct a price index for the price level in:
   1. 2016

2. 2017

3. 2018

Answer 1

a. i) Cost of the basket of goods in 2016 = ($5 * 20) + ($20 * 5) + ($1 * 40) = 100 + 100 + 40 = $240

    ii) Cost of the basket of goods in 2017 = ($5 * 20) + ($25 * 5) + ($1 * 40) = 100 + 125 + 40 = $265

    iii) Cost of the basket of goods in 2018 = ($6 * 20) + ($30 * 5) + ($1 * 40) = 120 + 150 + 40 = $310

b) Inflation between 2016 and 2017 = [(265 - 240) / 240] * 100 = 10.42%

c) Inflation between 2017 and 2018 = [(310 - 265) / 265] * 100 = 16.98%

d. i) price index for the price level in 2016 = (240 / 240) * 100 = 100

   ii) price index for the price level in 2016 = (265 / 240) * 100 = 110.42

   iii) price index for the price level in 2016 = (310 / 240) * 100 = 129.17