Although inflation has been steady at a 2.5% average rate, economists now see tr

Question

Although inflation has been steady at a 2.5% average rate, economists now see trouble on the horizon due to the increases in crude oil prices over the next eight years. The leading economists in the oil industry expect oil prices to inflate; at first 3 years 4% annually, fourth year5%, fifth year6%, sixth 8%, seventh and eighth year 10%. You own a fuel oil company, and you need to revise your eight-year budget to include these expected increases in oil prices. Compute the geometric mean percentage inflation rate f for the eight-year period to two decimal places accuracy.

Explanation / Answer

Geometric mean = nth root of product of n number.

Here number is year. we have 8 years thus

n = 8

Product of n numbers = 4*4*4*5*6*8*10*10 = 1536000

nth root of product = (1536000)1/8  = 5.933%

Hence geometric mean percentage inflation rate for eight year is 5.933%

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