8 . Problems and Applications Q3 Suppose that people consume only three goods, a
ID: 1167322 • Letter: 8
Question
8 . Problems and Applications Q3
Suppose that people consume only three goods, as shown in this table:
Complete the following table by computing the percentage change in price for each of the three goods.
Using a method similar to that used to calculate the consumer price index, the percentage change in the overall price level is.
True or False: If you were to learn that a bottle of Gatorade increased in size from 2017 to 2018, that information would raise your estimation of the inflation rate.
True
False
True or False: If you were to learn that Gatorade introduced new flavors in 2018, that would imply that the inflation rate you estimated is understated.
True
False
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Explanation / Answer
2017
2018
Price (A)
Qty
Total (B)
Price [C]
Qty
Total (D)
Change in price
(C-A)- [E]
% Change in price (E/A)*100
Change in overall price index
(D-B)- (E/total of B)*100
% change in overall price
Tennis Ball
2
100
200
4
100
400
2
100
200
Golf Balls
4
50
200
5
50
250
1
25
50
Bottles of Gatorade
2
300
600
3
300
900
1
50
300
1,000
1,550
550
55
The first part of true and false is TRUE as per my knowledge as if the size will increase with price remaining constant, the change in price percentage will increase with every other thing remaining constant other than the size of the product. For. Eg if suppose Qty for 2017 was 300 and for 2018 was 301 with price remaining constant the increase in price index will be more as compared to earlier
The second part as per my knowledge is FALSE as if the new flavors are introduced the price will increase as compared to the earlier price and so the inflation rate will be overstated and not understated
Please note the above answer is given as per my knowledge, there can be different answers
2017
2018
Price (A)
Qty
Total (B)
Price [C]
Qty
Total (D)
Change in price
(C-A)- [E]
% Change in price (E/A)*100
Change in overall price index
(D-B)- (E/total of B)*100
% change in overall price
Tennis Ball
2
100
200
4
100
400
2
100
200
Golf Balls
4
50
200
5
50
250
1
25
50
Bottles of Gatorade
2
300
600
3
300
900
1
50
300
1,000
1,550
550
55
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