The table below lists the prices and quantities consumed of three different good

Question

The table below lists the prices and quantities consumed of three different goods from 20102012. 2010 2011 2012 Good Price ($) Quantity Price ($) Quantity Price ($) Quantity

A 12 10 16 8 22 4

B 5 18 3 30 4 25

C 1 10 2 5 5 10

a. For 2010, 2011, and 2012, determine the amount that a typical consumer pays each year to purchase the quantities listed in the table above. Instructions: Round your answers to the nearest whole number. 2010 2011 2012 Consumer expenditure $ $ $ Instructions: Round your answers to two decimal places.

b. The percentage change in the amount the consumer paid is % from 2010 to 2011, and % from 2011 to 2012.

c. It is problematic to use your answers to part b as a measure of inflation because (Click to select)only price is changingonly consumption is changingboth price and consumption are changingonly income is changing. Instructions: Round your answers to two decimal places.

d. Suppose we take 2010 as the base year, which implies that the market basket is fixed at 2010 consumption levels. Using 2010 consumption levels, the rate of inflation is% from 2010 to 2011, and % from 2011 to 2012. Instructions: Round your answers to two decimal places.

e. Repeat the exercise from part d, now assuming that the base year is 2011. Using 2011 consumption levels, the rate of inflation is % from 2010 to 2011, and % from 2011 to 2012.

f. Your answers from parts d and e were different because (Click to select)the base years have the same consumption quantitiesprices have changedincome has changedthe base years put different weights on the goods.

Just need help with d & e!

Explanation / Answer

Solution:

A) For Year 2010
the consumer pays 12*10 = $120 for commodity A.
For commodity B, 5*18 = 90
For commodity C, 1*10 = 10
Total expenditure in year 2010 = Expenditure on (A+B+C) = 120+90+10 = $220
Similarly, for year 2011
16*8+3*30 + 2*5 = $228
for year 2012
22* 5+4*25+5*10 = $260
B) % change in expenditure in 2011 = (228-220)/220 = 3.64%
% change in expenditure in 2012 = (260-228)/228 = 14.04%
D) Taking 2010 as the base year ,
Cost of market basket in year 2010 = $220
Cost of market basket in year 2011 = 16*10+3*18+2*10 = $234
CPI(consumer price index) for 2011 = 234/220 *100 = 106.36
Inflation rate = (106.36-100)/100 = 0.0636 = 6.36%
(not CPI of base year is always 100)
For 2012, cost of market basket = 10*22+4*18 +10*5 = $342
CPI for 2012 = 342/220 *100 = 155.45
Inflation rate = (155.45-100)/100 = 0.5545 = 55.45%
E)
Taking 2011 as the base year,
Cost of maket basket in year 2011 = $228
Cost of market basket in year 2010 = 12*8+5*30+1*5 = $251
CPI(Consumer price index) for 2010 = 251/228*100 = 110.09
Inflation rate = (110.09-100)/100 = 0.1009 = 10.09%
(note CPI of base year is always 100)
For 2012, Cost of market basket = 22*8+4*30+5*5 = $321
CPI for 2012 = 321/228 * 100 = 140.79
Inflation rate = (140.79-100)/100 =0.4079= 40.79%

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