Question

Eastland College is concerned about the rising price of textbooks that students must purchase. To better identify the increase in the price of textbooks, the dean asks you, the Economics Department’s star student, to create an index of textbook prices. The average student purchases three English, two math, and four economics textbooks per year. The prices of these books are given in the accompanying table. 2012 2013 2014 English textbook $100 $110 $114 Math textbook 140 144 148 Economics textbook 160 180 200 Using 2013 as a base year, create a market basket and than a price index for 2012. 2013. 2014 What is the inflation rate from 2012 to 2014?

Answer 1

SOLUTION:

Cost of textbooks:

Year - 2012 = [(3 * $100) + (2 * $140) + (4 * $160)] = $1,220

Year - 2013 = [(3 * $110) + (2 * $144) + (4 * $180)] = $1,338

Year - 2014 = [(3 * $114) + (2 * $148) + (4 * $200)] = $1,438

　

Price Index value

Year - 2012 = [$1,220/$1,338] * 100 = 91.2

Year - 2013 = [$1,338/$1,338] * 100 = 100

Year - 2014 = [$1,438/$1,338] * 100 = 107.5

Inflation rate from 2012 to 2014:

= [107.5 – 91.2] / 91.2) * 100

= 17.9%