Chapter 21, Problem 1QFR

To determine

To find:

The change in price due to inflation if the price of laptop falls from $2,000 to $800 and the consumer price index increases from 100 to 238.

Explanation of Solution

The change in price is calculated below:

  $\begin{array}{c}\text{Price}\text{Index}=\frac{\text{Basket}\text{Price}}{\text{Basket}\text{Price}\text{in}\text{base}\text{year}}\times 100\\ =\frac{\$800}{\$2,000}\times 100\\ =40\end{array}$

  $\begin{array}{c}\text{Inflation}\text{Rate}=\frac{{\text{CPI}}_{\text{x+1}}-{\text{CPI}}_{\text{x}}}{{\text{CPI}}_{\text{x}}}\\ =\frac{238-100}{100}\times 100\\ =138\%\end{array}$

The response does not appear to be correct, because it suggests that the basket price increases when CPI increases. For example, in some cases like the scenario above the basket price may decrease. This is due to advances in technology.

Economics Concept Introduction

Consumer price index:

The Consumer Price Index (CPI) is a tool that measures a basket of commodities and services, like transportation, food and medical care at weighted average rates. It is measured by weighing and averaging price modifications for each product in the predetermined commodity basket.