Question

Suppose that consumers purchase fish and computer chips. In 2010, one pound of fish costs $1, a computer chip costs $1, and the typical consumer buys 10 pounds of fish and 10 computer chips. In 2011, one pound of fish costs $2, a computer chip costs $0.50, and the typical consumer buys 5 pounds of fish and 20 computer chips. In 2012, one pound of fish costs $2.10, a computer chip costs $0.90, and the typical consumer buys 12 pounds of fish and 20 computer chips. Using 2011 as the base year, the inflation rate between 2012 and 2011 is _____ percent.

Answer 1

Answer:

42.5%

Explanation:

The computation of the inflation rate between 2012 and 2011 is shown below:

But before that we need to do the following calculations

Cost of basket for the year 2011 is

= 5 × 2 + 20 × 0.5

= 10 + 10

= 20

And the base year price index i.e. CPI is 100

Now

Cost of same basket in year 2012 is

= 5 × 2.10 + 20 × 0.90

= 10.5 + 18

= 28.5

Now  

CPI in 2012 is

= ($28.5 ÷ $20) × 100

= 142.5

So,

Inflation rate is

= (142.5 ÷ 100) - 1

= 1.425 - 1

= 0.425

= 42.5%