d by TOSHIBA es aplia.com/afjservlet/quitqui,action-takeC .Calculating inflation
ID: 1103266 • Letter: D
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d by TOSHIBA es aplia.com/afjservlet/quitqui,action-takeC .Calculating inflation using a price index Consider a fictional cbiles-00918ckem,1509830709397 0445824015463118163A7E00000 price index, the College Student Price Index (CSP), based on a typical college student's annual purchases. Suppose the following table shows information on the market basket for t he CSPI and the prices of each of the goods in 2010, 2011, and 2012 The cost of each item in the basket and the total cost of the basket are shown for 2010. Perform these same calculations for 2011 and 2012, and enter the results in the following table 2010 2011 2012 Price Cost Price Cost Price Cost Quantity in Basket (Dollars) Dollars) Dollars) (ollars) (Dollars) (Dollars) Notebooks 10 20 50 Calculators Large coffees Energy drinks 54 75 200 100 10 .75 200 400 200 200 Textbooks 100 1,000 120 1,200 1501 1,500 Total cost 1,470 1,764 2205 wW aExplanation / Answer
Price index= (cost of goods at current price / cost of goods at base year price)*100
Price index, 2011= 100* 1764/1470 = 120%
Price index, 2012= 100* 2205/1470= 150%
From 2010 to 2011, CSPI increased by ( 120-100)100/100= 20%
From 2011 to 2012 CSPI increased by (150-120)*100/120= 25%
Second statement is TRUE. CSPI overstates the inflation due to substitution bias. When price of one good increases consumer tend to substitute to lower priced goods.
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