Question

Suppose that the residents of Vegopia spend all of their income on cauliflower, broccoli, and carrots. In 2006 they buy 100 heads of cauliflower for $200, 50 bunches of broccoli for $75, and 500 carrots for $50. In 2007, they buy 75 heads of cauliflower for $225,80 bunches of broccoli for $120, and 500 carrots for $100.
b) Using 2006 as the base year calculate the CPI for each year.
c) What is the inflation rate in 2007? My answers: b)CPI of 2006= [($325/$325)x 100] = 100 CPI of 2007= [($425/$325) x 100] = 137 c) Inflation rate in 2007 = [(137-100)/100 x 100] = 37%
Inflation rate in 2007 is 37%.

Answer 1

Market prices for 2006.
100 heads of cauliflower = $200 => 1 head of cauliflower = $200 / 100 = $2.
50 bunches of broccoli = $75 => 1 bunch of broccoli = $75 / 50 = $1.50
500 carrots = $50 => 1 carrot = $50 / 500 = $0.10
Total cost of items of food = $2 + $1.50 + $0.10 = $3.60

Market prices for 2007.
75 heads of cauliflower = $225 => 1 head of cauliflower = $225 / 75 = $3.
80 bunches of broccoli = $120 => 1 bunch of broccoli = $120 / 80 = $1.50
500 carrots = $100 => 1 carrot = $100 / 500 = $0.20
Total cost of items of food = $3 + $1.50 + $0.20 = $4.70

CPI of 2006 = $3.60 / $3.60 x 100 = 100
CPI of 2007 = $4.70 / $3.60 x 100 = 130.56

Inflation rate in 2007 = (130.56 - 100) / 100 x 100 = 30.56%