Suppose that in Monrovia the consumer market basket is defined as three oranges,

Question

Suppose that in Monrovia the consumer market basket is defined as three oranges, si cupcakes, and two quarts of milk. Furthermore, suppose you have the following price information Year 2011 2012 2013 Price of oranges Price of cupcakes $2 $3 $4 Price of milk $2 $2 $1 a) Use the above information to complete the following table. (3 points) Cost of market basket in 2011 Cost of market basket in 2012 Cost of market basket in 2013 b) Using 2012 as the base year complete the following table. Calculate your answer to one place past decimal. (3 points) Year 2011 2012 2013 CPI with base year 2012 c) Calculate the rate of inflation using the CPI you calculated in part (b) and fill in your results in the table below. Calculate the inflation rate to the nearest whole percent. (2 points) Year 2011 2012 2013 Annual Inflation Rate

Explanation / Answer

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Porange Pcupcakes Pmilk Qoranges Qcupcakes Qmilk 1 2 2 3 6 2 1 3 1 2 4 1 a) Cost of market basket in 2011 19 Cost of market basket in 2012 23 Cost of market basket in 2013 32 *Cost of market basket in a year =(Porange*Qorange)+(Pmilk*Qmilk)+(Pcupcakes*Qcupcakes) b) Year CPI in base year 2012 2011 82.6087 2012 100 2013 139.1304 CPI = (Cost of market in Current year)/(Cost of market in base year) c) Year Annual inflation rate 2011 2012 21.05263 2013 39.13043 d) Now we have changed the base year to 2013. Using the formula in part b) Year CPI with base year 2013 2011 59.375 2012 71.875 2013 100 e) Inflation is the growth rate of CPI Year Annual inflation rate 2011 2012 21.05263 2013 39.13043 f) No the results do not alter with change in the base year.

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