In 1991, the Barenaked Ladies released their hit song \"if I Had a Million Dolla
ID: 1214566 • Letter: I
Question
In 1991, the Barenaked Ladies released their hit song "if I Had a Million Dollars." How much money would the group need in 2012 to have the same amount of real purchasing power in 2012? Note that the consumer price index in 1991 was 136.2 and in 2012 it was 230. Suppose that the residents of Greenland play golf incessantly. In fact, golf is the only thing that they spend their money on They buy golf balls, clubs, mid tees. In 2010, they bought 1.000 golf balls for $2.00 each. 100 clubs for $50 each, and 500 tees for $0.10 each. In 2011, they bought 1.100 golf balls for $2.50 each, 75 clubs for $75.00 each, and 1.000 tees for $0.12 each. What is the CPI for each year? What was the inflation rate in 2011? If healthcare costs make up 10% of total expenditures and they rise by 15% while the other components in the consumer price index remain constant, by how much will the price index rise?Explanation / Answer
(1) Real purchasing power, 2012 = $1,000,000 x (CPI, 2012 / CPI, 1991) = $1,000,000 x (230 / 136.2)
= $1,688,693
(2) CPI is computed by keeping the quantities purchased each year the same as base year quantities.
(a)
Cost of basket, 2010 ($) = 1,000 x 2 + 100 x 50 + 500 x 0.1 = 2,000 + 5,000 + 50 = 7,050
Base year CPI being 100, CPI for 2010 = 100
Cost of basket, 2011 ($) = 1,000 x 2.5 + 100 x 75 + 500 x 0.12 = 2,050 + 7,500 + 60 = 9,610
CPI in 2011 = ($9,610 / $7,050) x 100 = 1.3631 x 100 = 136.31
(b)
Rate of inflation = % Change in CPI = (136.31 / 100) - 1 = 1.3631 - 1 = 0.3631, or 36.31%
Note: Firs two questions are answered.
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