Answered: Consider a fictional price index, the…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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1. Calculating inflation using a simple price index

Consider a fictional price index, the College Student Price Index (CSPI), based on a typical college student’s annual purchases. Suppose the following table shows information on the market basket for the CSPI and the prices of each of the goods in 2017, 2018, and 2019.

The cost of each item in the basket and the total cost of the basket are shown for 2017.

Perform these same calculations for 2018 and 2019, and enter the results in the following table.

Suppose the base year for this price index is 2017.

In the last row of the table, calculate and enter the value of the CSPI for the remaining years.

Between 2017 and 2018, the CSPI increased by__________

Between 2018 and 2019, the CSPI increased by__________

Which of the following, if true, would illustrate why price indexes such as the CSPI might overstate inflation in the cost of going to college? Check all that apply.

As the price of calculators rose, fewer students decided to buy them, opting instead to use the free calculators in their cell phones or on their computers.

A new mobile device for personal computing became available for purchase.

Professors required each student to buy 15 notebooks, regardless of the price.

Energy drinks became increasingly popular on college campuses between 2017 and 2019 due to significant improvements in flavor, but this quality change is hard to measure.

Notebooks
Calculators
Large coffees
Energy drinks
Textbooks
Total cost
Price index
Quantity in Basket
15
1
250
50
10
Price
(Dollars)
2
70
2
2
120
2017
Suppose the base year for this price index is 2017.
Cost
(Dollars)
30
70
500
100
1,200
1,900
100
Price
(Dollars)
5
100
2
4
150
2018
Cost
(Dollars)
2019
Price
Cost
(Dollars) (Dollars)
8
130
2
6
180

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