Price indexes can be used to compare prices across different periods. Suppose th

Question

Price indexes can be used to compare prices across different periods. Suppose that a year of tuition for college at public institutions averaged a cost of $1,817 in 1989 and that the CPI index was 114 in 1989. If the CPI index was 225 in 2009, then the cost of tuition in 2009, as the result of inflation, would equal $ (Enter your response rounded to the nearest -whole number.) Suppose that the actual average cost of tuition in 2009 was $6,893 Relative to the expected cost computed above, the cost of tution increased by the amount of inflation.

Explanation / Answer

Given

CPI1989 = 114

P1989 = 1817

CPI2009 = 225, P2009 = ?

CPI2009 / CPI1989   = P2009 / P1989

=> 225 / 114 = P2009 / 1817

=> P2009 = $3586

If actual average cost of tuition in 2009 was $6893, cost of tuition increased by (6893 - 3586) = $3307 more than amount of inflation

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