Chapter 11, Problem 1 Suppose that the residents of Vegopia spend all of their i

Question

Chapter 11, Problem 1
Suppose that the residents of Vegopia spend all of their income on Cauliflower, broccoli, and carrots. In 2008, they buy 100 heads of cauliflower for $200, 50 bunches of broccoli for $75, and 500 carrots for $50. In 2009, they buy 75 heads of cauliflower for $225, 80 bunches of broccoli for $120, and 500 carrots for $100.
a. Calculate the price of each vegetable in each year.
b. Using 2008 as the base year, calculate the CPI for each year.
c. What was the inflation rate in 2009?

Explanation / Answer

Since the base year is 2010, the CPI is 100. To calculate the CPI for 2011, you need to calculate the total basket of goods in both years. 2010: $200+$75+$50=$325 2011: $225+$120+$100=$445 CPI: [(Total Dollar Purchases Year 1)/(Total Dollar Purchases Year 0)]*100 ($445/$325)*100=136.92 Therefore your CPI is 136.92 for 2011. c) Inflation is the rate of change of the prices after some period. You need to calculate the prices per unit in one year, find their total and compare them to the second year. In this case: 2010: $2/Head of Cauliflower, $1.5/Bunch of Broccoli $.10/Carrot - Total of prices per unit = $3.60 2011: $3/Head of Cauliflower, $1.5/Bunch of Broccoli $.50/Carrot - Total of prices per unit = $5.00 Inflation calculation= [(Prices in Year 1 - Prices in Year 0)/Prices in Year 0]*100 [($5.00-$3.60)/$3.60]*100=38.8888% Therefore the rate of inflation is 38.89% for 2011.

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