Question

In an imaginary economy, consumers buy only razors and cologne. The fixed basket consists of 6 razors and 4 bottles of cologne. A razor cost $20 in 2009 and $25 in 2010. A bottle of cologne cost $30 in 2009 and $40 in 2010. Using 2009 as the base yeara. What is the CPI for 2009?b. What is the CPI for 2010?c. What is the inflation rate for 2010?

Answer 1

Answer:

The answers are:

1. The CPI for 2009 is 100 (since it is the base year)
2. The CPI for 2010 is 129.17
3. The inflation rate for 2010 is 29.17%

Explanation:

CPI basket for 2009

• 6 razors x $20 per razor = $120
• 4 bottles of cologne x $30 per bottle = $120

The total value of the CPI basket for 2009 is $240

CPI basket for 2010

• 6 razors x $25 per razor = $150
• 4 bottles of cologne x $40 per bottle = $160

The total value of the CPI basket for 2010 is $310

1. The CPI for 2009 is 100, since it is the base year
2. The CPI for 2010 = (CPI basket 2010 / CPI basket 2009) x 100 = ($310 / $240) x 100 = 129.17
3. The inflation rate for 2010 = [(CPI basket 2010 / CPI basket 2009) - 1] x 100 = (1.2917 - 1) x 100% = 29.17%