Question

Suppose that people consume only three goods, as shown in this table:

	Tennis Balls	Golf Balls	Bottles of Gatorade
2017
Price	$2	$4	$2
Quantity	100	50	300
2018
Price	$4	$5	$3
Quantity	100	50	300

Complete the following table by computing the percentage change in price for each of the three goods.

	Tennis Balls	Golf Balls	Bottles of Gatorade
Percentage Change	%	%	%

Using a method similar to that used to calculate the consumer price index, the percentage change in the overall price level is.

True or False: If you were to learn that a bottle of Gatorade increased in size from 2017 to 2018, that information would raise your estimation of the inflation rate.

True

False

True or False: If you were to learn that Gatorade introduced new flavors in 2018, that would imply that the inflation rate you estimated is overstated.

True

False

Answer 1

ANSWER:

1) % Change in tennis balls = ( (new price - old price) / old price ) * 100 = (( 4 - 2) / 2 ) * 100 = (2 / 2) * 100 = 100%

2) % change in golf balls = ( (new price - old price) / old price ) * 100 = ( ( 5 - 4) / 5 ) * 100 = ( 1 / 5 ) * 100 = 20%

3) % change in gatorade bottles = ( (new price - old price) / old price ) * 100 = ( ( 3 - 2) / 2) * 100 = ( 1 / 2) * 100 = 50%

4) 2017 basket = price of tennis ball in 2017 * quantity of tennis balls in 2017 + price of golf balls in 2017 * quantity of golf balls in 2017 + price of bottle of gatorade in 2017 * quantity of bottle of gatorade in 2017 = ( 2 * 100 + 4 * 50 + 2 * 300) = ( 200 + 200 + 600 ) = 1000

2018 basket = price of tennis ball in 2018 * quantity of tennis balls in 2018 + price of golf balls in 2018 * quantity of golf balls in 2018 + price of bottle of gatorade in 2018 * quantity of bottle of gatorade in 2018 = ( 4 * 100 + 5 * 50 + 3 * 300) = ( 400 + 250 + 900 ) = 1550

the base year will be 2017.

in 2017 price level will be = (2017 basket / base year basket) * 100 = (1000 / 1000) * 100 = 100%

in 2018 price level will be = (2018 basket / base year basket) * 100 = (1550 / 1000) * 100 = 155%

percentage change from 2017 to 2018 = ( ( price level in 2018 - price level in 2017) / 100 * 100) = (155 - 100 ) * 100 = (55 / 100) * 100 = 0.55 * 100 = 55%

so there is a 55% change in price level.

5) FALSE because the value of bottle is more then before

6 ) true because more flavours would lead to change in quality , which would enhance the way the ingredients have been used.