Question

The price tag on a tennis ball in 1975 read $0.10, and the price tag on a tennis ball in 2005 read $1.00. The CPI in 1975 was 52.3, and the CPI in 2005 was 191.3. Refer to Scenario 24-1. In 1975 dollars, a 1975 tennis ball cost $0.10 and a 2005 tennis ball cost a. $0.27, so tennis balls were cheaper in 1975. b. $0.27, so tennis balls were cheaper in 2005. c. $3.66, so tennis balls were cheaper in 1975. d. $3.66, so tennis balls were cheaper in 2005

Answer 1

Answer:

Option (a) is correct.

Explanation:

Given that,

In 1975:

Nominal price = $0.10

CPI = 52.3

In 2005:

Nominal price = $1.00

CPI = 191.3

1975 is the base year

Real price in 2005;

= Nominal price in 2005 × (CPI in 1975 ÷ CPI in 2005)

= $1.00 × (52.3 ÷ 191.3)

= $0.273

Therefore, the real price of tennis ball in 2005 is $0.27 in terms of 1975.

The real price of tennis ball in 1975 is $0.10 because the base year is 1975 itself.

When we are comparing the real prices of the years 2005 and 1975, we conclude that tennis ball is cheaper in 1975 as compared to 2005.