2. Suppose that the residents of Vegopia spend all of their income on cauliflowe

Question

2. Suppose that the residents of Vegopia spend all of their income on cauliflower, broccoli, and carrots. In 2008, they buy 100 heads of cauliflower for $200, 50 bunches of broccoli for $100, and 500 carrots for $50. In 2009, they buy 75 heads of cauliflower for $240, 80 bunches of broccoli for $180, and 500 carrots for $100.

a) Calculate the price of each vegetable in each year.

Year Cauliflower Broccoli Carrots

2008


2009






b) Using 2008 as the base year, calculate the CPI for each year.





c) What is the inflation rate in 2009?

Explanation / Answer

a) Cauliflower: $200/100 heads = $2/head and $225/75 heads = $3/head Broccoli: $75/50 bunches = $1.50/bunch and $120/80 bunches = $1.50/bunch Carrots: $50/500 carrots = $0.10/carrot and $100/500 carrots = $0.20/carrot b) The CPI for the first year is the sum of what they paid for those goods, or $200+$75+$50=$325 The CPI for the second year is how much the same number of goods would cost at the second year's prices, or 100 heads*$3 + 50 bunches*$1.50 + 500 carrots*$0.20 = $475 c) The inflation rate is (CPI2 - CPI1)/CPI1 = (475-325)/325 = .4615 = 46.15%

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