Question 3 Suppose that people consume only three goods, as shown in following t

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Question 3 Suppose that people consume only three goods, as shown in following table. (7 Pts.)

Golf Balls

Golf Clubs

Gatorade

2013 Price

$2

$200

$1

2013 Quantity

100

10

200

2014 Price

$3

$250

$2

2014 Quantity

150

20

250

Note: Use fixed basket of goods: 100 balls, 10 clubs, 100 Gatorades. Base year is 2013.

What is the percentage change in the price of each of the three goods? (1 Pt.) What is the percentage change in the overall price level (inflation rate)? (4 Pts.)

Golf Ball:

Golf Club:

Gatorade:

Find CPI and Overall Price Level Change:

Do golf clubs become more or less expensive relative to Gatorade? (1 Pt.) Does the well-being of some people change relative to the well-being of others? Explain. (2 Pts.)

Golf Balls

Golf Clubs

Gatorade

2013 Price

$2

$200

$1

2013 Quantity

100

10

200

2014 Price

$3

$250

$2

2014 Quantity

150

20

250

Explanation / Answer

a. % change in price = (new price - old price)/old price*100.

% change of price of golf balls = (3 - 2)/2*100 = 50%.

% change of price of golf clubs = (250 - 200)/200*100 = 25%.

% change of price of gatorade = (2 - 1)/1*100 = 100%.

b. Given that the fixed basket of goods is = 100, 10, 100 resp balls, clubs, and gatorade.

The cost of basket of fixed goods with 2013 prices = 100*2 + 10*200 + 100*1

Cost of basket at 2013 prices = 2300.

Cost of fixed basket at 2014 prices = 100*3 + 10*250 + 100*2

Cost of basket at 2014 prices = 3000.

Given 2013 as the base year,

CPI = cost of basket og goods at current prices/cost of basket of goods at base year prices*100.

CPI in 2013 = 2300/2300*100 = 100 (base year CPI is always 100).

CPI in 2014 = 3000/2300*100 = 130.434.

c. Inflation = (CPI of 2014 - CPI of 2013)/CPI of 2013*100

Inflation = (130.434 - 100)/100*100 = 30.434%.

d. The prices of gatorade rse by 100%, whereas that of golf clubs rose by 25%, thus gatorade became more expensive than clubs.

Those people who buy more of gatorade and golf balls have become relatively worse off as compared to those who buy more of golf clubs as the price rise is more in case of gatorade (100%) and golf balls (50%) than golf clubs (25%).

There is only increase in price without any change in the quality of goods produced, therefore the well-being of the consumers would reduce.

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