Suppose that people consume only three goods, as shown in this table. 1. What is

Question

Suppose that people consume only three goods, as shown in this table.

1. What is the percentage change in the price of each of the three goods?

2. Using a method similar to the consumer price index, compute the percentage change in the overall price level.
?

3. If you were to learn that a bottle of Gatorade increased in size from 2011 to 2012, should that information affect your calculation of the inflation rate?
--select--Yes, it would reduce my calculation.Yes, it would raise my calculation.No.Item 5

4. If you were to learn that Gatorade introduced new flavors in 2012, should that information affect your calculation of the inflation rate?
--select--Yes, it would reduce my calculation.Yes, it would raise my calculation.No.Item 6

? Tennis Balls Golf Balls Bottle of Gatorade 2011 price $2 $4 $1 2011 quantity 100 100 200 2012 price $2 $6 $2 2012 quantity 100 100 200

Explanation / Answer

A:
?P(Tennis balls) % = 100x((2/2)-1) = 0%
?P(Golf balls) % = 100x((6/4)-1) = +50%
?P(Bottle of G) % = 100x((2/1)-1) = +100%

B:
Output in 2006 in 2006 prices =
= $2x100 + $4x100 + $1x200 = $200+ $400+ $200 = $800
Output in 2006 in 2007 prices =
= $2x100 + $6x100 + $2x200 = $200+ $600+ $400 = $1'200
Change in price level = 100 x ((1'200/800) - 1) = +50%

C:
If increase was for the same amount for both years (06 and 07) then there will be no any effect on inflation.

D:
It may be considered as relative decrease in price (better product for the same price) - thus will provide pressure to deflation or reduce inflation (if it not just marketing but real increase of utility from product).

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