In 1971, the cost of a four-year college degree from a public university was about $1,410. The consumer price index was 40.48 in January 1971. If the current consumer price index is 251.1, what is the approximate cost of the four-year degree in current dollars?
In 1971, the cost of a four-year college degree from a public university was about $1,410. The consumer price index was 40.48 in January 1971. If the current consumer price index is 251.1, what is the approximate cost of the four-year degree in current dollars?
Chapter1: Making Economics Decisions
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![### Understanding Inflation and Its Impact on Education Costs
In 1971, the cost of a four-year college degree from a public university was about $1,410. The Consumer Price Index (CPI) was 40.48 in January 1971. If the current Consumer Price Index is 251.1, what is the approximate cost of the four-year degree in current dollars?
### Options:
- $227
- $9,422
- $8,746
- $1,410
### Explanation:
The CPI is an index that measures the average change in prices over time that consumers pay for a basket of goods and services. To find the cost of the college degree in current dollars, we need to adjust the 1971 cost for inflation, using the given CPI values.
Using the formula for adjusting for inflation:
\[ \text{Cost in Current Dollars} = \text{Cost in 1971 Dollars} \times \left( \frac{\text{CPI in Current Year}}{\text{CPI in 1971}} \right) \]
\[ \text{Cost in Current Dollars} = 1410 \times \left( \frac{251.1}{40.48} \right) \]
Calculate the ratio:
\[ \frac{251.1}{40.48} \approx 6.20 \]
Now multiply the original cost by this ratio:
\[ 1410 \times 6.20 = 8746.20 \]
Therefore, the approximate cost of the four-year degree in current dollars is:
**$8,746**
This example illustrates how inflation impacts the cost of education over time.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fbd5dde13-40d9-4c41-95d5-f4d0c4142f00%2F85527e7e-dcbc-4a4b-9286-3587464ea503%2Fved9ty.jpeg&w=3840&q=75)
Transcribed Image Text:### Understanding Inflation and Its Impact on Education Costs
In 1971, the cost of a four-year college degree from a public university was about $1,410. The Consumer Price Index (CPI) was 40.48 in January 1971. If the current Consumer Price Index is 251.1, what is the approximate cost of the four-year degree in current dollars?
### Options:
- $227
- $9,422
- $8,746
- $1,410
### Explanation:
The CPI is an index that measures the average change in prices over time that consumers pay for a basket of goods and services. To find the cost of the college degree in current dollars, we need to adjust the 1971 cost for inflation, using the given CPI values.
Using the formula for adjusting for inflation:
\[ \text{Cost in Current Dollars} = \text{Cost in 1971 Dollars} \times \left( \frac{\text{CPI in Current Year}}{\text{CPI in 1971}} \right) \]
\[ \text{Cost in Current Dollars} = 1410 \times \left( \frac{251.1}{40.48} \right) \]
Calculate the ratio:
\[ \frac{251.1}{40.48} \approx 6.20 \]
Now multiply the original cost by this ratio:
\[ 1410 \times 6.20 = 8746.20 \]
Therefore, the approximate cost of the four-year degree in current dollars is:
**$8,746**
This example illustrates how inflation impacts the cost of education over time.
Transcribed Image Text:### Steps to Calculate the Inflation Rate
#### Question:
Which of the following correctly shows the steps needed to calculate the inflation rate?
#### Options:
1. **Option 1:**
- Find out what people typically buy, collect the prices from the stores where people shop, tally up the cost of the basket of goods and services, and calculate the inflation rate.
2. **Option 2:**
- Tally up the cost of the basket of goods and services, subtract the value of goods and services that are no longer counted in the basket, and then calculate the inflation rate.
3. **Option 3:**
- Find the total value of the basket of goods and services, assess quality changes from one period to the next, and measure the inflation rate.
4. **Option 4:**
- Collect prices from the stores where people shop, assess the substitution that people make from low inflation to high inflation products, and calculate the difference in the prices that people pay.
#### Explanation:
Each option outlines a different method to measure the inflation rate, reflecting various approaches used in economic theory and practice.
1. The first option involves gathering current consumer data, collecting prices, and composing a cost of a fixed basket of goods and services to compute the inflation rate, which is a standard method.
2. The second option suggests adjusting for items no longer in the basket before calculating inflation, which can be useful in ensuring the basket remains representative.
3. The third option emphasizes quality changes over time which can affect the true cost of living and is a refined method of measuring inflation.
4. The fourth option accounts for substitution effects where consumers switch to different products as prices change, offering a dynamic alternative measure of inflation.
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