Chapter 15, Problem 4MCQ

To determine

The question requires us to determine the value of the price index.

Explanation of Solution

The price index measures the change in prices of a basket of goods and services at a given time. It is used to calculate the inflation rate in an economy.

The price index is calculated by using the current year price and base year price of the same basket of goods and services where the base year is an arbitrary year chosen for comparing the price level.

The formula for the price index is:

  $\text{Price}\text{index=}\frac{\text{Price}\text{of}\text{good}\text{in}\text{current}\text{year}}{\text{Price}\text{of}\text{good}\text{in}\text{base}\text{year}}\text{×100}$

The value of the price index always equals 100. With the following example, this can be seen:

Suppose,

Year 2001 is the base year.

Price of goods in the year 2001 = $300

  $\begin{array}{c}\text{Price}\text{index}\text{for}\text{year}2010\text{=}\frac{\text{Price}\text{of}\text{good}\text{in}\text{current}\text{year}}{\text{Price}\text{of}\text{good}\text{in}\text{base}\text{year}}\text{×100}\\ =\frac{\$300}{\$300}\times 100\\ =100\end{array}$

The price index for the year 2010 is 100.

Therefore, option “b” is correct.