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

Question

What is the percentage change in the price of each of the three goods?
b. Using a method similar to the consumer price index, compute the percentage change in the overall price level.
c. 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? If so, how?
d. If you were to learn that Gatorade introduced new flavors in 2012, should that information affect your calculation of the inflation rate? If so, how?

Explanation / Answer

without the data, I can't answer exactly but in general: To compute percentage price change subtract the old price from the new price, divide by the old price and then multiply by 100% [(New - Old)/Old)]*100% = percentage change in price. For instance, if the new price were $2 and the old price was $1: [(2-1)/1] * 100% = [1/1] * 100% = 1 * 100% = 100%. So the percentage change in price is 100% b) The consumer price index computes the percent change in overall price level by a basket of goods where the prices are weighted by the quantity purchased. For instance if there were 3 goods, A, B and C, priced $1, 2$ and $5, and the consumer buys 5, 3 and 1 unit of each, you would first compute the price level of that basket: 5*1 (for good A) + 3*2 (for good B) + 1 * 5 (for good C) = $16 Now say that the price of A changes to 1.50, B to 2.25 and C to 6. Using the same quantitites as the old basket: 5*1.50 (for good A) + 3*2.25 (for good B) + 1 * 6 (for good C) = $20.25. This is the cost of the new basket. Now just compute the percent change in price as before [new-old/old]*100% For this example [(20.25 - 16)/16)] * 100% = (4.25/16)*100% = 0.265625 * 100% = 26.5625% Thus the percent change in the overall price level is 26.5625% c) if the size increased, this information should be included in the inflation rate by adjusting the weight on the price of gatorade to reflect the new quantity. If in 2011 the size was 16 oz and they purchased 2 bottles, and the size in 2012 was 20oz and they purchased 2 bottles, the total quantity purchased has increased by 8oz (a 25% increase) so you would need to adjust the weighting on the price of gatorade from 2 (for 2 bottles) to 1.75 for proper comparison of price levels d) New flavors are a new product, this information is not included in the calculation of the inflation rate since it was not a part of the basket that was used to compute the price level in 2011 Again, without the data, I can't answer the specific problems, but the methods I showed above will work for whatever data you have.

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