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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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 2019, 2020, and 2021.

The cost of each item in the basket and the total cost of the basket are shown for 2019.

Perform these same calculations for 2020 and 2021, and enter the results in the following table.

	Quantity in Basket	2019	2020	2021
Price	Cost	Price	Cost	Price	Cost
(Dollars)	(Dollars)	(Dollars)	(Dollars)	(Dollars)	(Dollars)
Notebooks	10	3	30	3		4
Calculators	1	75	75	80		104
Large coffees	300	2	600	2		2
Energy drinks	75	2	150	4		5
Textbooks	8	90	720	110		120
Total cost	5	5	1,575	5		5
Price index	5	5	100	5		5

Suppose the base year for this price index is 2019.

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

Between 2019 and 2020, the CSPI increased by

. Between 2020 and 2021, 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.

Professors required each student to buy 10 notebooks, regardless of the price.

Energy drinks became increasingly popular on college campuses between 2019 and 2021 due to significant improvements in flavor.

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

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.

In the last row of the table, calculate and enter the value of the CSPI for the remaining years.
Between 2019 and 2020, the CSPI increased by
%. Between 2020 and 2021, 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.
Professors required each student to buy 10 notebooks, regardless of the price.
Energy drinks became increasingly popular on college campuses between 2019 and 2021 due to significant improvements in flavor.
A new mobile device for personal computing became available for purchase.
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.

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 2019, 2020, and 2021.
The cost of each item in the basket and the total cost of the basket are shown for 2019.
Perform these same calculations for 2020 and 2021, and enter the results in the following table.
Notebooks
Calculators
Large coffees
Energy drinks
Textbooks
Total cost
Price index
Quantity in Basket
10
1
300
75
8
5
5
Price
(Dollars)
3
75
2
2
90
5
5
2019
Suppose the base year for this price index is 2019.
Cost
(Dollars)
30
75
600
150
720
1,575
100
Price
(Dollars)
3
80
2
4
110
5
5
2020
Cost
(Dollars)
Price
(Dollars)
4
104
2
5
120
5
5
2021
Cost
(Dollars)

Expert Solution

Step 1

CSPI stands for College Student Price Index.

It is a price index.

There is a market basket that consists of notebooks, calculators, large coffee, energy drinks, and textbooks.

Price index = (Total cost of the market basket in the current year / Total cost of the market basket in the base year)

The year 2019 is the base year.

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