Question

Assume that you live in a simple economy in which only three goods are produced and traded: Cashews, pecans and almonds. Suppose that on January 1st 2105, cashews sold for $12.50 per pound, pecans were $4.00 per pound, and almonds were $5.50 per pound. At the end of the year you discover that the cashew crop was lower than expected and that cashew prices had increased to $17.00 per pound, but pecan prices stayed at $4.00 and almond prices has actually fallen to $3.00. Can you say what happened to the overall "price level"? How might you construct a measure of the "change in price level"? What additional information might you need to construct your measure?

Answer 1

Answer:

Step-by-step explanation:

The information given in the question can be represent in a table format for better understanding with the additional columns as follows:

Items          Weights Q₀         Prices P₀      Prices P₁        P₀Q₀        P₁Q₀

Cashew        1                        $12.50           $17.00        $12.50      $17.00

Pecans         1                         $4.00            $4.00         $4.00        $4.00

Almonds       1                         $5.50           $3.00          $5.50        $3.00

Total                                                                                 $22           $24

Can you say what happened to the overall "price level"?

The changes in overall price level can be a result of a condition termed as inflation rate

How might you construct a measure of the "change in price level"?

To construct a measure of the change in price level; we need to determine the consumer price index (CPI).

The consumer price index can be determined by using the relation:

$=\mathbf{\dfrac{Sum \ of \ P_1Q_0}{Sum \ of \ P_oQ_o}*100 }$

$= \mathbf{\dfrac{24}{22}*100 }$

= 109.0%

consumer price index (CPI) is 109.0% ; This implies that there is a 9.9% inflation in the economy.