Consider a simple economy that produces only three products: haircuts, hamburger
ID: 1143006 • Letter: C
Question
Consider a simple economy that produces only three products: haircuts, hamburgers, and DVDs. Use the information in the following table to calculate the inflation LOADING... rate for 2014, as measured by the consumer price index LOADING.... BASE YEAR (2002) 2013 2014 Product Quantity Price Price Price Haircuts 2 $10.00 $11.00 $16.20 Hamburgers 6 2.00 2.45 2.40 DVD's 4 15.00 15.00 14.00 The inflation rate for 2014 as measured by the consumer price index is 2.9 nothing%. (Round your response to two decimal places.)
Explanation / Answer
2002 as base year
2013
2014
Product
Quantity
Price
Price
Price
Haircuts
2
10
11
16.2
Hamburgers
6
2
2.45
2.4
DVDs
4
15
15
14
Value of the basket in 2002 = 2*10+6*2+4*15 = $92
Value of the basket in 2013 = 2*11 + 6*2.45 + 4*15 = $96.7
Value of the basket in 2014 = 2*16.2 + 6*2.4 + 4*14 = $102.8
Now,
CPI in 2013 = Basket in 2013*100/basket in base year = 96.7*100/92 = 105.11
CPI in 2014 = Basket in 2014*100/basket in base year = 102.8*100/92 = 111.74
So,
Inflation in 2014 = (111.74-105.11)/ 105.11
Inflation in 2014 = 6.31%
2002 as base year
2013
2014
Product
Quantity
Price
Price
Price
Haircuts
2
10
11
16.2
Hamburgers
6
2
2.45
2.4
DVDs
4
15
15
14