Consider a frictional price index, the College Student Price Index (CPSI), based

Question

Consider a frictional price index, the College Student Price Index (CPSI), based on a survey of annual purchases of a typical college student. Suppose the following table shows information on the market basket for the CSPI and the prices of each good in 2012, 2013, and 2014. The cost of each item in the basket and the total cost of the basket are shown for 2012. Perform these same calculations for 2013 and 2014, and enter the results in the table. Suppose the base year for this price index is 2012. Calculate and enter the value of the CSPI for the remaining years in the last row of the table. Between 2012 and 2013, the CSPI increased by. Between 2013 and 2014, the CSPI increased by. Which of the foilowng, 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. Professors required each student to buy 10 notebooks, 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. The quality and design of calculators improved dramatically from 2012 to 2014. For example, calculators made in 2014 accept memory cards, whereas those made in 2012 do not.

Explanation / Answer

a. Cost = Quantity*Price.

b. PRice index for 2013 = total expenditure in 2013/expenditure in 2012*100

Price index = 1680/1400*100 = 120.

Price index for 2014 = 2100/1400*100 = 150.

c. % increased from 2012 to 2013 = (120-100)/100*100 = 20%

d. % increased from 2013 to 2014 = (150-120)/120*100 = 25%.

2013 2014 Quantity Price Cost Price Cost 10 7 70 11 110 1 110 110 140 140 150 1 150 1 150 50 3 150 4 200 10 120 1200 150 1500 Total Cost 1680 2100

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