Question 1. CPI (Consumer Price Index) (30 points in total; 10 points for each p

Question

Question 1. CPI (Consumer Price Index) (30 points in total; 10 points for each part) The residents of a beautiful beach town in Asia are mostly senior citizens. Each resident consumes 730 prepared meals and 12 new sets of clothing per year. These meals and clothing form the consumption "basket" for each resident. In 2014, each meal cost $3 and each set of clothing cost S40. In 2015, each meal cost $4 and each set of clothing cost $45. In 2016, each meal cost $5 and each set of clothing cost $50 a] Compute the costs of the consumption "basket" for each resident in this beach town in each year (i.e., 2014, 2015 and 2016). b] Using 2014 as the base year, compute CPI for 2015 and 2016, respectively. [cj Use the CPI for 2015 and 2016 to compute the inflation rate between 2015 and 2016. (Hint: the inflation rate equals the percentage change in CPI between 2015 and 2016)

Explanation / Answer

[a]

Cost of basket, 2014 ($): 3 x 730 + 40 x 12 = 2,190 + 480 = 2,670

Cost of basket, 2015 ($): 4 x 730 + 45 x 12 = 2,920 + 540 = 3,460

Cost of basket, 2016 ($): 5 x 730 + 50 x 12 = 3,650 + 600 = 4,250

[b]

CPI, 2015 = (Cost of basket in 2015 / Cost of basket in 2014) x 100 = ($3,460 / $2,670) x 100 = 129.59

CPI, 2016 = (Cost of basket in 2016 / Cost of basket in 2015) x 100 = ($4,250 / $3,460) x 100 = 122.83

[c]

Inflation rate = (122.83 / 129.59) - 1 = 0.9479 - 1 = - 0.0521 = - 5.21%

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