Question

In: Economics

Consider a fictional price index, the College Student Price Index (CSPI), based on a typical college...

Consider a fictional price index, the College Student Price Index (CSPI), based on a typical college student’s annual purchases. Suppose the following table shows information on the market basket for the CSPI and the prices of each of the goods in 2017, 2018, and 2019.

The cost of each item in the basket and the total cost of the basket are shown for 2017.

Perform these same calculations for 2018 and 2019, and enter the results in the following table.

Quantity in Basket

2017

2018

2019

Price

Cost

Price

Cost

Price

Cost

(Dollars)

(Dollars)

(Dollars)

(Dollars)

(Dollars)

(Dollars)

Notebooks 15 2 30 5 8
Calculators 1 70 70 100 130
Large coffees 250 2 500 2 2
Energy drinks 50 2 100 4 6
Textbooks 10 120 1,200 150 180
Total cost 1,900
Price index 100

Suppose the base year for this price index is 2017.

In the last row of the table, calculate and enter the value of the CSPI for the remaining years.

Between 2017 and 2018, the CSPI increased by. Between 2018 and 2019, the CSPI increased by.

Which of the following, if true, would illustrate why price indexes such as the CSPI might overstate inflation in the cost of going to college? Check all that apply.

The quality and design of calculators improved dramatically from 2017 to 2019. For example, calculators made in 2019 accept memory cards, whereas those made in 2017 do not, but this quality change is hard to measure.

Professors required each student to buy 10 textbooks, regardless of the price.

As the price of textbooks increased, more and more students turned to the used-book market or chose not to buy textbooks at all, instead using the copies on reserve in the library.

A new, safe method of memory enhancement became available for purchase.

Solutions

Expert Solution

.

Quantity in Basket

2017

2018

2019

Price

Cost

Price

Cost

Price

Cost

(Dollars)

(Dollars)

(Dollars)

(Dollars)

(Dollars)

(Dollars)

Notebooks 15 2 30 5 75 8 120
Calculators 1 70 70 100 100 130 130
Large coffees 250 2 500 2 500 2 500
Energy drinks 50 2 100 4 200 6 300
Textbooks 10 120 1,200 150 1500 180 1800
Total cost 1,900 2375 2850
Price index 100 125 150

base year for this price index is 2017.

Between 2017 and 2018, the CSPI increased by 125-100/100*100 = 25%

Between 2018 and 2019, the CSPI increased by.150-125/125*100 = 20%

Which of the following, if true, would illustrate why price indexes such as the CSPI might overstate inflation in the cost of going to college

-The quality and design of calculators improved dramatically from 2017 to 2019. For example, calculators made in 2019 accept memory cards, whereas those made in 2017 do not, but this quality change is hard to measure.

-As the price of textbooks increased, more and more students turned to the used-book market or chose not to buy textbooks at all, instead using the copies on reserve in the library.

-A new, safe method of memory enhancement became available for purchase


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