Question

The monthly market basket for consumers consists of​ pizza, t-shirts, and rent.   The table below shows market basket quantities and prices for the base year​ (Year 1) and in the following two years. Product Base Year​ (Year 1) Quantity Price in the Base Year Price in Year 2 Price in Year 3 Pizza 20 ​$3.50 ​$4.38 ​$4.55 ​T-Shirts 3 ​$20.00 ​$18.00 ​$20.00 Rent 1 ​$350.00 ​$385.00 ​$437.50 The inflation rate between Year 1 and Year 2 is nothing​%. ​ (Round both answers to one decimal place.​) The inflation rate between Year 2 and Year 3 is nothing​%.

Answer 1

Solution:-

Product	Quantity	Year :- 1	Year :- 1	Year :- 1
Pizza	20	$3.50	$4.38	$4.55
T-Shirts	3	$20	$18	$20
Rent	1	$350	$385	$437.50

Calculate the Cost of market basket:-

Year 1 = ($3.5 * 20) + ($20 * 3) + ($350 * 1)

            = $70 + $60 + $350

            = $480

Year 2 = ($4.38 * 20) + ($18 * 3) + ($385 * 1)

            = $87.6+ $54 + $385

            = $526.6

Year 2 = ($4.55 * 20) + ($20 * 3) + ($437.50 * 1)

            = $91 + $60 + $437.50

            = $588.5

CPI = (current year cost / base year cost) * 100

Year 1: (480 / 480) * 100 = 100

Year 2: (526.6 / 480) * 100 =109.71

Year 3: (588.5 / 480) * 100 =120.60

Inflation rate = {(Current year CPI - Previous year CPI) / Previous year CPI}*100

Year 2 = {(109.71 - 100) / 100}*100

            = (9.71 / 100) * 100

            = 0.0971 *100

            = 9.71%

Year 3 = {(120.60 - 109.71) / 109.71} *100

            = (10.89 / 109.31) * 100

            = 0.09962 *100

            = 9.96%