Question

1. In an imaginary economy, consumers buy only hot dogs and hamburgers. The fixed basket consists of 15 hot dogs and 8 hamburgers. A hot dog cost $2.25 in 2006 and $5.40 in 2007. A hamburger cost $5.75 in 2006 and $7.86 in 2007. Calculate the CPI for both years and then find the inflation rate.

2. In an imaginary economy, consumers buy only sandwiches and magazines. The fixed basket consists of 25 sandwiches and 40 magazines. In 2006, a sandwich cost $4.50 and a magazine cost $3.99. In 2007, a sandwich cost $5.75. If the inflation rate in 2007 was 21 percent, then how much did a magazine cost in 2007?

3. When Anders took out his first two-year membership with Maxima Gym in 2004, the fee was $525.00. He renewed his membership three times; in 2006 for $580.00, in 2008, for $600.00, and again in 2010, for $699.00. What is the OVERALL rate of inflation for Anders' gym membership?

4. In 1949, Sycamore, Illinois built a hospital for about $500,000. In 1987, the county restored the courthouse for about $2.4 million. A price index for nonresidential construction was 12 in 1949, 96 in 1987, and 117.5 in 2000. Calculate the value of the courthouse in 2000 dollars and the value of the hospital in 2000 dollars and compare your answers. Which one cost more?

5. Ruben earned a salary of $60,000 in 2001 and $80,000 in 2006. The consumer price index was 156 in 2001 and 227.25 in 2006. What is Ruben's 2006 salary in 2001 dollars? What does this mean about how his purchasing power increased or decreased?

Answer 1

Item	Quantity (2006)	Price 2006 $	Quantity (2007)	Price 2007$	market basket in 2006 $	market basket in 2007 $
Hot dogs	15	2.25	15	5.40	33.75	81.00
Hamburgers	8	5.75	8	7.86	46.00	62.88
					79.75	143.88
CPI formula	(Base year basket quantity times current year prices)/Base year basket quantities times base year prices)100
CPI in 2006 (base year) is 100.
CPI in 2007
CPI=( Cost of the base year market basket in the current period/Cost of the base year market basket in the base period)x100
(143.88/79.75)*100
180.4137931
180.4
Inflation rate=
Inflation rate in 2007
(Current period CPI-Prior period CPI)/Prior period CPI
(180.4-100)/100=80.4%
2)
Item	Quantity (2006)	Price 2006 $		Price 2007$	market basket in 2006 $	market basket in 2007 $
Sandwiches	25	4.50	25	5.75	112.50	143.75
Magazines	40	3.99	40		159.60	0.00
					272.10	143.75
CPI formula	(Base year basket quantity times current year prices)/Base year basket quantities times base year prices)100
CPI in 2006 (base year) is 100.
CPI in 2007
inflation rate is 21%.
Market basket in 2006 is $272.10
Let market basket in 2007 be x
To get market basket in 2007, apply the CPI formula=(x/272.10)=121
Solving the equation, we get market basket in 2007 as 329.24 (272.10x121)/100
Cost of magazine
329.24-143.75
185.49=$4.64