(Consumer Price Index) Calculate a new consumer price index for the data in the
ID: 1250622 • Letter: #
Question
(Consumer Price Index) Calculate a new consumer price index for the data in the following exhibit. Assume that current-year prices of Twinkies, fuel oil, and cable TV are $0.95/package, $1.25/gallon, and $15.00/month, respectively. Calculate the current year’s cost of the market basket and the value of the current year’s price index. What is this year’s percentage change in the price level compared to the base year?
Twinkies: Quantity in Market Basket - 365 packages
Prices in Base Year - $0.89/packages
Cost of Basket in Base Year (2) = (1) x (2) - $324.85
Prices in Current Year - $288.35
Cost of Basket in Current Year (5) = (1)x(4) - $288.35
Fuel Oil - Quantity in Market Basket – 500 gallons
Prices in Base Year - $1.00/gallon
Cost of Basket in Base Year (2) = (1) x (2) - $500
Prices in Current Year - $1.50
Cost of Basket in Current Year (5) = (1)x(4) - $750.00
Cable TV - Quantity in Market Basket – 12 month
Prices in Base Year - $30.00/month
Cost of Basket in Base Year (2) = (1) x (2) - $360.00
Prices in Current Year - $30.00
Cost of Basket in Current Year (5) = (1)x(4) - $360.00
Explanation / Answer
1.) The first step is to calculate the amount you spent in the previous period on the basket of good in question. In this case these amounts are already provided, just add them together. So 324.85+500+360=1184.85. 2.) Next is to repeat step one using the current year values. So 288.35+750+360=1398.35. 3.) Then find the difference between the two years. So 1398.35-1184.85=213.50. 4.)Then divide the difference between the amount from the base year. So 213.50/1184.85=0.1802. 5.) Finally multiply that amount by 100. So 0.1802*100=18.02. Then add 100 (the base year CPI is always 100) to get this year's CPI which is 118.02. Good luck with your studies!
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