1. Calculating inflation using a simple priceindex
Consider a fictional price index, the College Student PriceIndex (CSPI), based on a typical college student’s annualpurchases. Suppose the following table shows information on themarket basket for the CSPI and the prices of each of the goods in2017, 2018, and 2019.
The cost of each item in the basket and the total cost of thebasket are shown for 2017.
Perform these same calculations for 2018 and 2019, and enter theresults in the following table.
| Quantity in Basket | 2017 | 2018 | 2019 |
|---|
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 | | | 1,575 | | | | |
| Price index | | | 100 | | | | |
Suppose the base year for this price index is 2017.
In the last row of the table, calculate and enter the value ofthe 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 priceindexes such as the CSPI might overstate inflation in the cost ofgoing to college? Check all that apply.
Professors required each student to buy eight textbooks,regardless of the price.
As the price of textbooks increased, more and more studentsturned to the used-book market or chose not to buy textbooks atall, instead using the copies on reserve in the library.
The quality and design of calculators improved dramatically from2017 to 2019. For example, calculators made in 2019 accept memorycards, whereas those made in 2017 do not, but this quality changeis hard to measure.
A new, safe method of memory enhancement became available forpurchase.
