HW_Assignment4

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Economics

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Feb 20, 2024

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Home Work Assignment 4 (24 points maximum) Calcula:on of Consumer Price Index and Rate of Inﬂa:on: In Hampston, there are only 3 goods: popcorn, movie shows, and diet drinks. The following table shows the prices and quan@@es produced of these goods in 1980, 1990, and 1991: A "market bundle" for a typical family is deemed to be 5 popcorn, 3 movie shows, and 3 diet drinks. Q.1. Compute the consumer price index (CPI) for each of the three years, using 1980 as the base year (4 points) For 1980: (5 x $1.00) + (3 x $5.00) + (3 x $0.70) = $22.10 For 1990: ((5 x $1.00) + (3 x $10.00) + (3 x $0.80) = $37.40 For 1991: (5 x $1.05) + (3 x $10.50) + (3 x $0.75) = $39 CPI (1980) = Cost of basket goods/ Cost of basket goods In base year) x 100 (22.1/22.1) x 100 = 100 CPI (1990) = (37.40/22.1) x 100 = 169.230769 CPI 1991 = (39/22.1) x 100 = 176.470588 Q.2. what was the rate of inﬂa@on from 1990 to 1991, using the CPI you calculated in (Q.1.)? (4 points) Inﬂa@on Rate From 1990 to 1991 176.470588 - 169.230769 - divided by 169.230769 x 100 = 4.27807501 or 4.3 Q.3. Now compute the CPI for each of the three years, using 1990 as the base year instead of 1980 but using the same "market bundle." (4 points) CPI (1980) = (22.1/37.40) x 100 = 59.090 or 59.1 CPI (1990) = (37.40/37.40) x 100 = 100 CPI (1991) = (39/37.40) x 100 = 104.27 or 104.3

Q.4. what was the rate of inﬂa@on from 1990 to 1991, using the CPI you calculated in (Q.3.)? Is it the same as your answer to (Q.2.)? (4 points) 104.27 - 100 divided by 100 x 100 = 4.27 or 4.3 This is the same answer to Ques@on 2 Q.5. Now suppose that a new market bundle is defined; the "market bundle" is now 6 popcorn, 2 movie shows, and 4 diet drinks. Compute the CPI for the three years, using this "market bundle" and using 1980 as the base year. (4 points) For 1980: (6 x $1.00) + (2 x $5.00) + (4 x $0.70) = $18.8 For 1990: ((6 x $1.00) + (2 x $10.00) + (4 x $0.80) = $29.20 For 1991: (6 x $1.05) + (2 x $10.50) + (4 x $0.75) = $30.30 CPI (1980) = (18.8/18.8) x 100 = 100 CPI (1990) = (29.20/18.8) x 100 = 155.319149 CPI (1991) = (30.30/18.8) x 100 = 161.170213 Q.6. what was the rate of inﬂa@on from 1990 to 1991, using the CPI you calculated in (Q.5.)? Explain why it is different from your answer to (Q.2.)? (4 points) CPI (1991) - CPI (1990) divided by (1990) x 100 = 161.170213 - 155.319149 divided by 155.319149 x 100 = 3.7671234 or 3.8 This is different from the answer on Ques@on 2 because the market bundle changed when we increased the quan@ty of popcorn and diet drinks and decreased the quan@ty of movie shows the most expensive of them all.

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